Commissioner of Income Tax vs Dosseni Films

Suhas Chandra Sen, J.—The following two questions of law have been referred to this Court by the Tribunal u/s 256(1) of the income tax Act, 1961 (''the Act''):

" 1. Whether, on the facts and in the circumstances of the case and having regard to the fact that the decision of the Tribunal dated 12-8-1976 referred to in question No. 1 above was given after considering all the circulars issued by the Central Board of Direct Taxes regarding the amortisation of the cost of feature films since 1937, the Tribunal was justified in holding that there was apparent mistake in the order of the Tribunal dated 12-8-1976?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Circular No. 30 dated 4-10-1969 issued by the Central Board of Direct Taxes should be applied in deciding the correct rate of amortisation of the cost of acquiring the distribution rights of the films in the case of the assessee?"

The reference relates to the assessment year 1970-71, for which the relevant period of account is the year ending on 31-3-1970. It has been contended on behalf of the department that the Tribunal has rectified its earlier order and that the rectification order was not made according to law. Next, it was argued that two views were possible to be taken with regard to scope and effect of the various circulars and also the applicability thereof. It was further argued that the Tribunal should not have entertained the miscellaneous application for rectification of its earlier order.

Mr. Dhar, appearing on behalf of the assessee, has invited our attention to the four circulars that were supposed to have been placed before the Tribunal at the time of hearing of the case regarding amortisation of the cost of production of a film. The first circular is dated 4-1-1951. In that clause 1 of the said circular refers to the representation made by the film industry. Clause 2 lays down how the expenses should be allowed and clause 3 lays down that the circular will apply also in the case of the distributor in the same way as the cost of production to be treated in the hands of the film producer and the methods of allowance and the manner of their application will be as indicated in paragraph 2 of the circular. This was followed by another circular dated 4-10-1969. By this circular, the Board referred to the earlier circular dated 4-1-1951 and modified paragraph 2 of the circular dated 4-1-1951. In other words, the Board changed the method of computation of the allowance and also the rate applicable to various film producers in the years mentioned in the circular.

The effect of the next circular was only to modify paragraph 2 of the circular dated 4-1-1951. The circular dated 4-10-1969 did not strike put the earlier circular at all but only brought about some changes in paragraph 2 of the earlier circular changing the rates of allowance and the manner of their application.

The third Circular No. 92, dated 18-9-1972. This circular also, once again, lays down the manner in which the allowance, that has to be given, has to be worked out. The Circular dated 4-10-1969 specifically refers to the Circular dated 9-4-1959. Therefore, the effect of these circulars was that certain allowances were to be given. In other words, the Board decided to give certain allowances to the film industries and those allowances were enumerated in paragraph 2. The contents of paragraph 2 were changed from time to time but the contents of paragraph 3 of the Circular dated 4-1 -1951 by which the Board had directed that the cost of acquiring distribution right should be treated in the hands of the distributors in the same way as in the hands of the producer, were not changed by any subsequent circulars.

Lastly, came the Circular No. 92, dated 18-9-1972 and Circular dated 5-12-1974. The assessment years involved in this case being the assessment years 1970-71 and 1971-72, these circulars on the face of it, should not have been applied to these years. The law must be the law as was in force on the first day of the assessment year.

Moreover, in the instant case, the assessment had been completed on 25-3-1974. There is, however, a directive in the circular dated 5-12-1974 that all pending assessments might be regulated in accordance with the guidelines spelt out in that circular, namely, the case where the assessments were completed in accordance with the instructions contained in Board''s Circular No. 92, dated 18-9-1972 and the appeals were pending either before the AAC or the Tribunal, the department might agree to such assessment being set aside and reframed on the basis of the guidelines laid down in that circular and the concerned assessee had agreed to the adoption of such a course of action.

Therefore, two things emerged from the above clarifications, namely:-

(1) that the Circular No. 92, dated 18-9-1972 was to be modified in the manner laid down in the Circular dated 5-12-1974, and

(2) that modification was for pending assessments.

In other words, the assessments which had been completed could not be brought within the ambit of the Circular dated 5-12-1974. Therefore, the Tribunal by relying on the Circular dated 5-12-1974 and Circular dated 18-9-1972 had obviously committed an error.

My attention was drawn to the judgment of the Kerala High Court in the case of Commissioner of Income Tax Vs. B.M. Edward, India Sea Foods, where it was held that constructions contained in the circular of the Board which were in force on the first day of the assessment year would be applicable and even if the ITO had made assessment subsequent to the withdrawal of the said circular, he would be bound by it.

The next case was also of the Kerala High Court in the case of Commissioner of Income Tax Vs. Geeva Films, . This case was also in respect of the assessment year 1972-73 and the question there was:

"Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal is justified in holding that the circular issued by the Central Board of Direct Taxes existing at the beginning of the assessment year will be applicable and the assessee would be entitled to 100 per cent amortisation for the assessment and the subsequent modification of the circular will have no relevance?" (p. 633)

In that case, the question was answered in the affirmative and in favour of the assessee.

An appeal was sought to be preferred against that decision to the Supreme Court but the Supreme Court dismissed the said SLP filed by the department. This fact is reported in 140 ITR (St.) 1 in SLP No. 1909 of 1980.

It has also been stated that various other High Courts have taken the similar view. There has not been any dissident voice.

This position is not contradicted on behalf of the revenue. If that be the case, I fail to see how could there be a difference of opinion in this case; it must be mentioned that the error was apparent to a person well versed in law. The ITO, the AAC and the Tribunal are expected to be well versed in law. Therefore, the error must be an error which is apparent to the person who is seeking to rectify his error. In our view, such an error was discovered in this case and the Tribunal had corrected the same in accordance with the law.

In that view of the matter, both the questions are answered in the affirmative and in favour of the assessee. There will be no order as to costs.