Commissioner of Income Tax vs N.T. Rama Rao (Huf)

Amareswari, J.—This is a reference application at the instance of the revenue. The assessee produced a feature film known as, "Kodalu Diddina Kapuram" which was released on 21-10-1970. The accounting year of the assessee is the calendar year. During the accounting year relevant to the asst. yr. 1972-73, the assessee purchased the rights of exhibition for the areas of Andhra Pradesh for a Telugu feature film by name "Srikrishna Satya". This film was released on 24-12-1971. The assessee claimed the entire cost of production for his Telugu film "Kodalu Diddina Kapuram" as deduction for the asst. yr. 1971-72 and the cost of lease rights amounting to Rs. 10 lakhs as a deduction for the asst. yr. 1972-73. The claims were based on a circular of the CBDT dt. 4-10-1969. This circular mentions that an assessee can claim write off of the entire cost of picture be it Producer or Distributor in the year in which the picture is released. It is on the basis of this circular that the assessee wrote off the cost of the picture for one year and the cost of purchase of lease rights for the second year. There is no dispute that this circular applies to the assessee''s case. But the ITO did not choose to apply this circular on the ground that the Central Board modified its directions by issuing another circular dt. 18-9-1972 (Circular No. 92) and still there was another circular in 1974. The second circular restricts the allowance on a graded scale depending on the cost of production. It is on the basis of the subsequent modified circular that the ITO allowed deductions which the AAC confirmed.

The matter was then carried by way of an appeal to the ITAT. It was contended before the Tribunal that the circular that was in force during the relevant assessment year is the circular dt. 4-10-1969 and if that circular is followed 100% deduction is allowable. It was stressed that the subsequent circular issued by the Board has no application and particularly when it is to the disadvantage of the assessee. This contention was accepted by the Tribunal and the Tribunal held that the assessee is entitled to 100% allowance and the circular that was in force during the relevant year governs the case.

It was also contended before the Tribunal that there was partition among the coparceners on 1-1-1972 and the individual coparceners thereafter entered into a partnership and had thrown this property into the common stock of the partnership. The department contended that this amounts to ''transfer of asset'' within the meaning of s. 34(3)(b) and as such the claim for development rebate is not allowable. It may be mentioned in this context that all the three Tribunals, i.e., the ITO, the AAC and the Tribunal found on facts that there was a partition in the family on 1-1-1972. However, the Tribunal held that there was no ''transfer'' within the meaning of s. 34(3)(b) inasmuch as there was no transfer by the assessee as contemplated under the said section and in any event no transfer was involved at all. It is on these facts that the revenue sought the reference on these two questions :

"1. Whether on the facts and in the circumstances of the case, the assessee was entitled to the benefits of deduction of the entire cost of production of the two firms ?

Whether on the facts and in the circumstances of the case, there is a transfer of asset ?"

So far as the first question, namely which is the circular that is to be applied in the present case, is concerned, we are of the view 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 IT Act. The 1969 Circular was admittedly in force during the relevant assessment year corresponding to 1-1-1970 to 31-12-1970 and 1-1-1971 to 31-12-1971. The revised circulars were issued only in September, 1972 and later in 1974. These circular which were issued subsequent to the relevant period cannot be applied to a period anterior thereto. In this view, we are fortified by a Full Bench decision of the Kerala High Court in Commissioner of Income Tax Vs. B.M. Edward, India Sea Foods, .

It would appear that the very same circular with which we are dealing now, viz., the circular of the 1969 was the subject-matter of consideration before the Kerala High Court, and the Kerala High Court held that the circular of CBDT as it stood at the beginning of the assessment year entitling the assessee to 100% amortisation (deduction) would be applicable and the subsequent withdrawal of the circular during the assessment year would have no effect. A special leave application filed against this judgment of the Kerala High Court was dismissed by the Supreme Court on 17-11-1982, vide Commissioner of Income Tax, Gujarat-III, Ahmedabad Vs. Ahmedabad Rana Caste Association, . the circulars which are in force during the relevant assessment years are the circulars that have to be applied and the subsequent circulars either withdrawing or modifying the earlier circulars have no application. Accordingly we answer the first question in the affirmative and in favour of the assessee.

Question No. 2 : The HUF is the assessee herein. Admittedly, there was a partition and the partion was on 1-1-1972, i.e., after the expiry of the years under reference. The next question for consideration is, whether there was a transfer within the meaning of s. 34(3)(b). It reads as under :

"34(3)(b). If any machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which if was acquired or installed, any allowance made under s. 33 or under the corresponding provision of the Indian IT Act, 1922 (11 of 1922) in respect of that ship, machinery or plant shall be deemed to have been wrongly made for the purposes of this Act, and provisions of sub-s. (5) of s. 155 shall apply accordingly."

The words "by the assessee" are significant. The section contemplates transfer of an asset by the assessee. In the present case, there was no transfer by the assessee. It is well settled that a partition does not amount to a transfer. See Commissioner of Income Tax, Madras Vs. M.K. Stremann, Madras, . What happened after the partition is of no consequence. We are not concerned here with the question whether there is a transfer when the individual coparceners have converted the asset into a partnership property. So far as the assessee is concerned, there is no transfer inasmuch it is a case of partition between the members of the HUF. The ld. counsel for the department strenuously contended that even though the transfer is not by the assessee, since a transfer is involved, the provisions of s. 34(3)(b) are attracted. In other words, he submits that since the plant and machinery in respect of which the development rebate is allowed in fact stood transferred to the partnership, there was a transfer within the meaning of this section. If this argument is to be accepted, we have to completely overlook the words "by the assessee" occurring in s. 34(3)(b). We do not think that any construction would permit us to ignore or eliminate the express words in the section. If that was the intention, the Legislature would not have used the words "by the assessee" and would have rest contended by simply stating "machinery or plant is sold or otherwise transferred to an person". In our view, the words "by the assessee" must receive the full meaning and it is only when the assessee transfers the asst, s. 34(3)(b) can be invoked. In the facts and circumstances of the case, there was no transfer by the assessee and hence the claim for allowance of development rebate cannot be accepted. We may state here that we express no opinion on the question whether there is a transfer when an individual throws his property into the common stock of the partnership. We would like to reserve it for another occasion. Accordingly, we answer this question in the negative and in favour of the assessee. No costs.