Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Jyothi Pictures on 5 June, 1987
Equivalent citations: [1987]169ITR412(AP)
Author: B.P. Jeevan Reddy
Bench: B.P. Jeevan Reddy
JUDGMENT B.P. Jeevan Reddy, J.
1. The Income-tax Appellate Tribunal has referred the following question under section 256(1) of the Income-tax Act, referred the following question under section 256(1) of the Income-tax Act, 1961 :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the assessee was justified in writing off the entire cost of production in the year of release of the film and deleting the addition of Rs. 1,34,40 ?"
2. The assessee was a registered firm engaged in distribution of films and also production and sale of pictures. It produced one picture known as "Adrusta Devatha" at a cost of Rs. 3,75,469. The picture was released on June 30, 1972. The accounting year followed by the assessee closed on September 30 of that year. The collections during the period of three months, i.e., between June 30, 1972, and September 30, 1972, came to Rs. 93,040. The assessee wrote off the entire cost of the picture as the picture ended in a flop. The Income-tax Officer, however, allowed amortisation allowance, according to the Board Circular, and, on that basis, disallowed a sum of Rs. 1,34,400. He added it back to the income returned. On appeal, the Appellate Assistant Commissioner upheld the assessee's contention holding that the addition of Rs. 1,34,400 by the Income-tax Officer to the assessee's income was not justified. Thereupon, the Revenue carried the matter in appeal to the Appellate Tribunal. The Appellate Tribunal, following the decision of the Bombay Bench of the Tribunal, as also the decision of the Hyderabad Bench of the Tribunal in the case of Sri N. T. Rama Rao (I. T. A. Nos. 2085 and 2086 (Hyd) of 1977-78) held that the assessee's claim should be accepted in its entirety. The Tribunal also observed that the firm was forced to dissolve itself on account of serious setback in the collections. Accordingly, it affirmed the order of the Appellate Assistant Commissioner. The Tribunal was of the opinion that the circular issued by the CBDT, in September, 1972, (Circular No. 92 dated September 18, 1972 - [1972] 86 ITR (St.) 29) is not applicable to the accounting year relevant to the assessment year concerned herein, and that the earlier circular issued by the CBDT in October, 1969 (Circular No. 30 dated October 4, 1969 - [1969] 74 ITR (St.) 9) alone applies.
3. On the subject of amortisation of the cost of production and cost of acquiring distribution rights of films, the Central Board of Direct Taxes has been issuing circulars from time to time. We are, however, concerned only with the two circulars referred to above. Circular No. 30 dated October 4, 1969, recited in paragraph 2 that the film producers have represented to the Board that a cinema film no longer has an effective life of about 3 years as was presumed by the Income-tax Department when devising the formula for the amortisation of the cost of the films spelt out in the Circular dated April 9, 1959, and that, thereupon - paragraph 3 says - the matter has been carefully considered by the Board and in view of the changed situation regarding the minimum guarantee system operating in the film industry at that time, it was thought appropriate to resort to the flexible rule in every case of amortisation of the cost of the film over a period of 3 years. The Board agreed that the effective and earning life of the large majority of the films seldom exceeds one year. In this view of the matter, it stated in paragraph 4 :
"It has accordingly been decided that if the producer of a film does not wish to write off the cost of the film in his books in the manner indicated in Board's Circular mentioned above, then he may be permitted to write of the entire cost in the year in which the picture is released. On his doing so, the entire cost of the film will be allowed as an admissible deduction in the year in which the picture is released and the cost of the film is written off in the books."
4. This circular was modified in Circular No. 92 dated September 18, 1972. In this circular, the Board stated that is has reconsidered the question relating to the amortisation of the cost of production of a feature film and that the effective life of a feature film depends on many factors, the most important among them being the market value of the stars acting in the films, which in turn is reflected in the cost of production. Accordingly, the feature films were categorised into three classes, viz., "A", "B" and "C". In category "A" were placed films, the cost of production of which is Rs. 35 lakhs and above. In category "B" were placed films whose cost of production was between Rs. 10 lakhs and Rs. 35 lakhs. Those films whose cost of production was below Rs. 10 lakhs were placed in category "C". It was observed that the normal effective life of an "A" class film is more than two years, while in the case of "B" and "C" class films, it was one year. It was, accordingly, directed by the Board that in the case of "B" and "C" class films, "the entire cost of production may be allowed in the very first year of production if the film was released in the first half of the accounting year. In case the film was released in the second half of the accounting year, the value of the film should be taken at 50% of the cost of production at the end of that accounting year and the balance 50% should be adjusted in the second year...." (In this case, we are not concerned with the other directions given in the said circular).
5. Now, according to the cost of production of the film with which we are concerned herein, it falls under class "C". If Circular No. 30 applies, then the assessee is entitled to write off the entire cost of production in the year in which the picture is released, and if it does so, the entire cost of the film will be allowed as an admissible deduction in the year in which the picture is released and the cost of the film is written off in the books. But, if Circular No. 92 applies, then the assessee would be entitled to write off only 50% of the cost of production in the year in which the film is released and the balance in the next year because, in this case, the film was released and the balance in the next year because, in this case, the film was released in the second half of the accounting year. As stated hereinbefore, the accounting year adopted by the assessee is from 1st October to 30th September of the succeeding year. The question is : which circular governs the assesse ? The assessment year is 1973-74 and the relevant accounting year is October 1, 1971, to September 30, 1972. There can be little dispute about the proposition that Circular No. 92 dated September 18, 1972, does undoubtedly apply to the assessment year 1973-74. Indeed, it was issued even during the currency of the assessee's accounting year relevant to the said assessment year. This is not even a case where the accounting year adopted by the assessee was over by the date of issuance of the revised circular (Circular No. 92). We are, therefore, unable to see why the revised circular can be said to be not applicable to the accounting year relevant to the assessment year concerned herein. Reliance has been placed by learned counsel for the assessee on the decision of this court in CIT v. N. T. Ramarao (H. U. F.) [1987] 163 ITR 453. In the said decision, it was held that the Circular dated October 4, 1969, was admittedly in force during the accounting years relevant to the assessment years concerned therein. In that case, the assessee was adopting the calendar year as his accounting year. The accounting years relevant in that case were January 1, 1970, to December 31, 1970, and January 1, 1971, to December 31, 1971, for which the assessment years were 1971-72 and 1972-73. It was held that "the circular that was in force during the year of assessment is the circular that should be applied while granting deductions under the relevant provisions of the Income-tax Act". Having enunciated the said principle, the Bench held that inasmuch as Circular No. 30 issued in the year 1969 was "admittedly in force during the relevant assessment years corresponding to January 1, 1970, to December 31, 1970, and January 1, 1971, to December 31, 1971", and because the revised circular was issued only in September, 1972, the revised circular has no application, and that the 1969 circular alone governs the matter. Support for the said proposition was drawn from the Full Bench decision of the Kerala High Court in CIT v. B. M. Edward, India Sea Foods . Evidently, what the Bench said was that since the revised circular was issued some time after the commencement of the assessment year 1972-73, i.e., was not in force on the first day of the assessment year 1972-73, it cannot be made applicable to that assessment year, much less to the preceding assessment year. That this is what the Bench meant is evident from a perusal of the Full Bench decision of the Kerala High Court relied upon by the Bench. The Kerala High Court was dealing with a circular of the Board of Revenue, issued in 1944 under section 5(8) of the Indian Income-tax Act, 1922 (corresponding to section 119 of the 1961 Act), which allowed the loss suffered by a spouse to be set off against the income of the other spouse. This circular was withdrawn on April 6, 1972, i.e., after the expiry of the assessment year 1971-72. The assessment relating to the income of the assessee for the assessment year 1971-72 was, however, completed only on March 12, 1974. Inasmuch as by that date the 1944 circular was withdrawn, the assessee's claim for extending the benefit of the 1944 circular to him was denied. The Tribunal, however, agreed with the assessee. When the matter came up to the High Court, the Full Bench held that inasmuch as the 1944 circular was in force and in operation throughout the assessment year 1971-72 and was withdrawn only after the expiry of the said assessment year, the assessee was entitled to the benefit of the 1944 circular. The Full Bench affirmed the principle that the instructions contained in the circular of the Central Board of Revenue, which was in force on the first day of the assessment year, would be applicable and the Income-tax Officer would be bound by it, even though he passed the assessment order subsequent to the withdrawal of the said circular.
6. If we apply the above principle to the facts of this case - as we are bound to do - it is evident that the revised circular issued in September, 1972, was in force on the first day of the assessment year concerned herein, viz., assessment year 1973-74. We are of the further opinion that in the absence of any indication under section 119 of the Act or in the circular issued by the Board of Revenue, the principle enunciated by the Full Bench of the Kerala High Court and affirmed by a Bench of this court in the decision referred to above, ought to be followed. The relevance of the accounting year followed by the particular assessee cannot be taken as relevant. What is relevant is the assessment year, and if the circular was in force on the first day of the assessment year, it would apply to that assessment year.
7. For the above reasons, we are of the opinion that the revised circular, i.e., Circular No. 92 dated September 18, 1972, applies and should be applied to the assessment year 1973-74 and that the Tribunal was not right in holding to the contrary. Accordingly, we answer the question referred to us in the negative, i.e., in favour of the Revenue and against the assessee. The Tribunal shall pass appropriate orders under section 260 of the Act in accordance with this answer. There shall be no order as to costs.