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TMI Blog1962 (12) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... details of their cost and their dates of release are as follows: Name of Picture Date of release Cost of production up to negative stage Cost of positives Total (1) (2) (3) (4) (5) Maheswari 13-11-1955 ₹ 3,08,557 ₹ 54,496 ₹ 3,63,053 Alibaba and Forty Thieves 12- 1-1956 ₹ 4,96,643 ₹ 2,99,367 ₹ 7,96,010 Total ₹ 8,05,200 ₹ 3,53,863 ₹ 11,59,063 3. The aforesaid pictures were shown by the assessee itself on its own account in certain districts but leased out to distributors on a three and four year contracts in other districts. To these exhibitors a few of the positives were distributed free, their proportionate cost being as follows: Rs. Maheswari 30,320 Alibaba and Forty Thieves 70,400 4. In the past, on all the assessee's productions of films, up to September 30, 1955, the entire cost of positives exhibited for more than six months in that year were written off and claimed as an expense, the rest were treated as stock-in-trade at its full value independent of the cost of production offered for amortisation. An attempt of the assessee to alter this method and to claim the whole outlay on prints a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree to the lessees and this at least should have been allowed as a revenue deduction." 8. The Appellate Assistant Commissioner accepted the assessee's contention and held that (i) the proviso to section 13 does not apply so that the assessee's treatment in the books must be accepted, and (ii) the life of the negative depended only on the "audience reaction", not in any case lasting beyond three years; it had nothing to do with the life of the positives; the positive prints taken out before and after release were indistinguishable from each other and that the cost of both constituted a legitimate deduction in the year in which it was incurred. His full reasons are to be found in paragraphs 3 to 6 of his order, annexed hereunto as annexure "A" and forms part of the case. 9. The department appealed to the Tribunal against the aforesaid decision raising the following grounds: "(2) The learned Appellate Assistant Commissioner has overlooked the fact that the cost of printing of the initial copies prior to the date of release should form part of the cost of production as without film copies there can be no exhibition or exploitation of the product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the positives given to the lessee. Therefore, in those circumstances, the expenditure incurred by the producer for taking the copies which he gave to the lessee would be capital expenditure. If, on the other hand, the assessee exploits the picture himself, the cost of copies taken would also be capital expenditure. But the principle of valuation mentioned above, namely, value it at nil after 150 shows, would apply. This is so because the life of a positive is only 300 shows and after that the assets get 'exhausted'. Its span of life is not beyond the year. It is like any current asset utilised in running the business. The cost of copies, if any taken, along with the negative for purpose of examining and trade exhibition and which are retained by the assessee, would be capital expenditure. Here the expenditure is incurred once for all and the benefit is long standing. The depreciation would be on enhanced value of the negative on the same basis as for the negative. The Income-tax Officer is directed to recompute the depreciation on the above principles." 11. In the reference application by the assessee in R.A. No. 369 of 1959-60, the assessee, inter alia, posed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The profit and loss account however is debited with ₹ 10,000. There is thus a difference of ₹ 4,000. When I asked Mr. Narayanaswamy the purpose for which this sum of ₹ 4,000 was paid, he explained that these gentlemen were receiving ₹ 4,000 as remuneration in the previous accounting years and that they have received an additional ₹ 6,000 as per the resolution. There is nothing in the resolution of the directors to suggest that the retaining fee of ₹ 500 per mensem is in addition to the sum of ₹ 4,000 that was being paid before the resolution was made. Under the circumstances I hold that the assessee has not substantiated the claim to deduct the sum of ₹ 4,000 paid in excess to these two gentlemen..........." 13. The Appellate Assistant Commissioner, in appeal, deleted the addition for the following reasons: "......On the Income-tax Officer's disallowing the amount of ₹ 4,000 the result is that no remuneration has been allowed to the advocates for the period October 1, 1954, to September 30, 1955, which, I believe, was never his intention. This is a public limited company and there do not appear to be any extra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In the year of account ended September 30, 1956, the assessee company had produced and released two pictures, viz., (1) Maheswari on November 13, 1955, and (2) Alibaba and Forty Thieves on January 12, 1956, the total cost being ₹ 3,53,863. In both cases, the cost of positive prints taken before the release of the pictures was debited separately to the profit and loss account and entirely claimed as a revenue outgoing of the accounting year, because the practice of the assessee had been till then to treat the expenses of the cost of positive prints for purposes of closing stock (1) at its full value if the picture had been released in the latter half of the year of account; and (2) at "nil" value if the picture had been released in the first half of the year of account. The Income-tax Officer did not accept this position and wanted to revise the valuation by including in the cost of production the cost of positive prints as well. The auditor of the assessee urged that the cost of positive prints should not be included under cost of production inasmuch as the life of a positive print is not long and that the cost of prints should be allowed as a revenue deduction. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -54, the Income-tax Officer added ₹ 61,983 as the value of positive films at the end of the year in respect of the pictures released in the latter half of the year admittedly completely as closing stock. He urged that such adjustments were made till and including the assessment year 1956-57. Lastly, he contended that the only case in which the Income-tax Officer could depart from this practice was to bring the case of the assessee in the orbit of the proviso to section 13 by showing that the correct income of the assessee could not be worked out from the method regularly followed, and as apparently, the Income-tax Officer's case did not depend on that aspect, he urged that the addition was not sustainable. 5. The Appellate Assistant Commissioner wrote: "When a method of accounting is regularly followed in a case, either followed by the assessee and accepted in the assessments or followed by the Income-tax Officer himself in the assessments, it should not be changed without giving proper reasons. In this case, the method followed in the prior assessments appears to be more reasonable than the method now followed by the Income-tax Officer. Therefore, it is quite cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1957-58?" The question that has been referred to us at the instance of the assessee in T.C. No. 119 of 1962 is as follows: "Whether, on the facts and in the circumstances of the case, the Income-tax Officer was justified in applying the proviso to section 13 of the Indian Income-tax Act." The assessee is a public limited company carrying on business as producers and distributors of films. During the year ended September 30, 1956, the previous year for the assessment year 1957-58, it produced and released two films called "Maheshwari" and Alibaba and Forty Thieves". The first of these two films was released on November 13, 1955, and the second on January 12, 1956. A number of positives were taken from the negatives of these films and they were distributed simultaneously with the release. The cost of production up to the stage of negatives and the cost of positives of these films are as follows: Name of the picture Cost of production up to negative stage Cost of positive Total Rs. Rs. Rs. Maheshwari 3,08,557 54,496 3,63,053 Alibaba & 40 Thieves 4,96,643 2,99,367 7,96,010 Total 8,05,200 3,53,863 11,59,063 These positives were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be added back to the income returned by the assessee. Similarly, in respect of the film "Alibaba and Forty Thieves", amortisation was worked out at 43%. This was on the footing that the film having been released on January 12, 1956, was screened for 266 days between January 12, 1956, and September 30, 1956. 43% represents 266/366 of 60%. The closing stock value arrived at by the officer was ₹ 4,53,730 as against the value of ₹ 2,73,154 fixed by the assessee. The difference between the two valuations, namely, ₹ 1,80,576, was directed to be added back to the income returned by the assessee. The assessee claimed by way of deduction a sum of ₹ 10,000 paid as remuneration to its legal advisers at Salem. The assessee was paying its legal advisers retainer of ₹ 4,000 for each calendar year. The payment for the calendar year 1955 was made on December 12, 1955. By a directors' resolution dated March 30, 1956, it was resolved that the legal advisers should be paid a monthly salary of ₹ 500. A time scale of salary was fixed (Rs. 500-50-750) and this was to take effect from October 1, 1955. In pursuance of this resolution the following p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en paid by the company to the legal advisers, the whole of it would be permissible deduction as otherwise the result would be that the remuneration paid between January 1, 1955, and September 30, 1955, would not come in for deduction at all. He therefore directed the deletion of the addition of ₹ 4,000. The department preferred an appeal to the Appellate Tribunal. The Tribunal agreed with the Appellate Assistant Commissioner that it would not be correct to equate the life of the positive to that of the negative. But, in the view of the Tribunal, it would not be proper for the assessee to claim the entire cost of the positives merely because the positives were screened even during the first half of the accounting year. In substitution of the mode of amortisation claimed by the assessee, the Tribunal observed that the value of the positive can be written off completely only after 150 shows. The Tribunal states in its order: "A more reasonable basis would be to write it off completely after 150 shows. Where the number of exhibitions are less than 150, the value of the positives should be shown as cost in the closing stock. This would, in our opinion, be a sound working pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in the course of the business which is carried on (Mallett v. Staveley Coal and Iron Co. Ltd.*). Circulating capital is a capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital is not involved directly in that process and remains unaffected by it (Van den Berghs Ltd. v. Clark**). This description of the two kinds of capital has been accepted as sound law in income-tax cases. In Reynolds & Gibson v. Crompton***, Jenkins L.J. however observed that the distinction between the two is debatable. The learned Lord Justice states: "...'circulating capital' is simply an expression used to denote capital expended in the course of the trade with a view to disposal at a profit of the assets produced or acquired by means of such expenditure...." In any view of the matter a film is not a capital asset. It resembles more a trading stock than a capital structure. The department also does not treat it as a capital. The terms of the Central Board of Revenue circular clearly emphasises that the amortisation allowance permitted is not in the nature of a depreciation allowance of a capital. The value of the capital does not enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a general rule the greatest deterioration in the value of a film takes place in the first year. The Income-tax Officer will have to decide for himself what figures to adopt in such a case since the 'life' of a film is subject to great variation. It has been suggested that a film may be valued at 40 per cent. of its cost after one year, 15 per cent. after two years and thereafter nothing. The actual percentages that should be adopted in the case of each film are however matters that must be decided on the merits of each case and no hard and fast rates can be laid down." There was a second circular dated January 4, 1951, and that reads: "On representations made by the film industry, the Board wish to make it clear that the general or 'standard' formula regarding amortisation of the cost of production of a film, at 60 per cent. in the first year, 25 per cent. in the second year and 15 per cent. in the third year should not be treated as inflexible and that it may be varied in favour of the assessee if he is able to prove by adducing appropriate evidence that the earning capacity of the film was extinguished much earlier than over the period presumed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he date prior to the last day of the accounting year and claim 60% amortisation. A "year" is taken as 365 or 366 days and if the film is released 183 days before the expiry of the accounting year amortisation that would be allowed is 183/365 of 60%, that is, 30%. No discussion on this question of the proper rule of amortisation of the negative of a film would be complete if we were not to refer to the decision of this court in Gemini Pictures Circuit Ltd. v. Commissioner of Income-tax [1958] 33 I.T.R. 547. The assessee in that case was a company carrying on business as producer, distributor and exhibitor of motion pictures. A motion picture was produced and released for public exhibition on October 21, 1949. The assessee treated "the year" not as a period of 12 months, but as its accounting year, and claimed the full allowance of 60% for the year 1949, though the film had run only for about 72 days in that year. The Income-tax Officer disregarded this method of valuation and adopted the strict time basis rule in the Central Board circular. He treated the film as suffering depreciation of 60% at a uniform rate for a period of 12 months and as the film had run on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration--as one of the factors from which the percentages of the depreciation should be worked out." We understand this decision not as laying down any definite code to be adopted in fixing amortisation rates of allowances. Rather it was a decision on the question, what was the true profits assessable to tax on the facts of the case. There can be no one standard or formula to ascertain the real income and what was done in that case can afford no guidance nor be treated as a judicial precedent in another case, widely different and distinctly remote from that case. We wish to point out that the subject-matter of amortisation allowance in the Gemini's case* was the negative film. Further, the details of income for three years were available. The learned judge however observed that the principle of amortisation would be the same even if the assessment were to be made only on the date of one year's income. Rajagopala Ayyangar J. observes: "There should however be no difficulty in applying the formula even if the first year's collections only are known. The nature of the fall in collections even during the year ought to afford some indication whether the picture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive prints can be written off in value only at the amortisation rates spread over three years as prescribed by the Central Board circular. This is an impossible and an untenable contention. The circular is inapplicable to prints, in the very nature of things. Undoubtedly, the cost of positive should be written off after 300 shows if not earlier. There can be no question of percentage amortisation in respect of a positive print where there is proof or where it can be safely presumed that 300 shows were got from the print within the accounting year. Bearing the above principles in mind, we shall now proceed to deal with the questions referred. The claim of the assessee is to have the total cost of positives, ₹ 3,53,863, allowed as a revenue expenditure. Treating them as stock-in-trade if they cease to have any value at the end of the year, the claim must be upheld. Till September 30, 1955, the assessee claimed as expenses the entire cost of positives, exhibited for more than six months in the accounting year and the rest, which had not been screened for the full six months, were treated as stock-in-trade at their full value, independent of the cost of production amortised unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax purposes, and that which method should be used was a matter of policy for the decision of the directors of a company. The Commissioners decided however that in order to arrive at a true figure of the cost of work-in-progress, a proportion of factory overheads but not of other indirect expenditure should be taken into account. It was held that the facts and findings in the case did not justify requiring the company to change from its practice of using the direct cost method. At page 572 Lord Reid observes thus: ".....if a method has been applied consistently in the past, then it seems to follow that it should not be changed unless there is good reason for the change sufficient to outweigh any difficulties in the transitional year." The true question which is very often blurred and lost sight of is not the propriety of the system of accounting which an assessee might have been following, but the ascertainment of the true profit. Pearce L.J. observes at page 562*: "The result has been that the ascertainment of the particular profits for the particular year--which, after all, was the real object of the enquiry-has been a little submerged by this ideological dispu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led. The question in T.C. No. 119 of 1962 and the question No. 1 in T.C. No. 90 of 1960 are therefore answered in favour of the assessee and against the department. What remains is question No. 2 in T.C. No. 90 of 1960. This relates to the disallowance of ₹ 4,000 paid by the assessee as remuneration to its lawyers. We have already pointed out that till the board of directors of the assessee passed a resolution fixing a monthly salary in the time scale of ₹ 500-50-750 for its legal advisers on March 30, 1956, the assessee was paying only an annual sum of ₹ 4,000. For the calendar year 1955 ₹ 4,000 was due to the legal advisers and this was paid on December 12, 1955. After the resolution of the directors dated March 30, 1956, amounts aggregating to ₹ 6,000 as per particulars given above were paid. The department and the Tribunal have allowed ₹ 6,000 as proper deduction in computing the income. But the Income-tax Officer, whose decision has now been affirmed by the Appellate Tribunal, disallowed the sum of ₹ 4,000 paid on December 12, 1955. The reasoning of the Tribunal is that the sum of ₹ 4,000 cannot be allowed as it does not relate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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