Commissioner of Income Tax vs Prasad Productions P. Ltd.

Ratnam, J.—At the instance of Revenue, u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ""the Act""), the following

questions of law have been referred for the opinion of this court :

For the assessment year 1971-72 and 1972-73 :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was justified in writing off

the entire cost of production of the pictures released during the relevant year by following the circular dated October 4, 1969, even though the

assessment was made after the coming into effect of Circular No. 92, dated September 18, 1972, modifying the Circular dated October 4, 1969 ?

For the assessment year 1973-74 :

Whether, on the facts and in the circumstances of the case and having regard to the provisions of rule 9A of the Income Tax Rules, 1962, the

Appellate Tribunal was right in holding that the cost of positive prints should be allowed as business expenditure u/s 37 of the income tax Act,

1961 ?

The assessee carries on the business of production and exploitation of feature films and had produced two feature films and released those

picture on April 7, 1970, during the accounting year September 1, 1969, to August 31, 1970, relevant to the assessment year 1971-72. Similarly,

during the previous year September 1, 1970 to August 31, 1971, relevant to the assessment year 1972-73, the assessee produced a feature film

and also acquired rights in three other pictures. During the accounting years relevant to the assessment years 1971-72 and 1972-73 and on the

first day of the assessment years in question and when the feature films produced by the assessee were released, Board Circular No. 30 dated

October 4, 1969, (See [1969] 74 ITR 9, was in force. According to paragraph 4 of that circular, 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 No. 4(XI-3)D of 1959, dated April 9, 1959, then, he may be

permitted to write off the entire cost in the year in which the picture is released and 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 of in the books.

Before the Income Tax Officer, on the strength of the Board''s Circular No. 30, dated October 4, 1969, the assessee claimed the entire cost of

production and acquisition as deduction, but, however, it so happened that the assessments for the two assessment year 1971-72 and 1972-1973

were completed after September, 1972, when Board''s circular No. 92, dated September 18, 1972 (See Commissioner of Income Tax, Poona

Vs. Manna Ramji and Co., , had come into force superseding the earlier Circular No. 30 dated October 4, 1969. As per Board''s Circular No.

92, dated September 18, 1972, feature films were categorised into three classes, viz., A, B and C, based on cost of production. Class A took in

feature films, the cost of production of which including cost of positives and advertisement expenses incurred by the producer was 35 lakhs of

rupees and above. In Class B were placed feature films, the cost of production of which was between 10 to 35 lakhs of rupees and Class C was

confined to feature films whose cost of production was below 10 lakhs of rupees. With reference to class A films, the Board directed that the

amortisation formula should be such that the value of the film will be depreciated by 60% in the first year 25% in the second year and 15% in the

third year on time basis. However, with regard to feature films in Classes B and C, the Board directed that the entire cost of production will be

allowed in the very first year of production if the film was released in the first half of the accounting year and if the film was released in the latter 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 the course of the assessment proceedings, the Income Tax Officer found that as the actual cost of

production of the feature films produced and released by the assessee exceeded 35 lakhs of rupees, amortisation could be allowed on the basis of

Circular No. 92 dated September 18, 1972. However, on appeal by the assessee, the Appellate Assistant Commissioner took the view that the

non-completion of the assessments prior to September 18, 1972, cannot be attributed to the assessee and for no fault of the assessee, the benefit

of the Board''s Circular No. 30, dated October 4, 1969, could be denied to it. Accordingly, the Appellate Assistant Commissioner, applying the

Board''s circular No. 30 dated October 4, 1969, directed that the entire cost of production of the films be allowed as deduction in the assessment

year 1971-72 in respect of the feature films produced and released by the assessee Consequent upon the conclusions so arrived at, the Income

Tax Officer was directed to make suitable modifications in the computation of the total income of the assessee. In the appeals before the Tribunal

at the instance of the Revenue, the Tribunal considered the views taken by the Bombay, Hyderabad and the Madras Benches of the Tribunal and

held that the assessee can take advantage of the Board''s Circular No. 30, dated October 4, 1969, as it was in force during the relevant

accounting years and assessment years and that the assessee was well within its rights in writing off the entire cost of production of the feature film

in the year of release itself and that the Board''s Circular No. 92, dated September 18, 1972, which was prejudicial to the assessee, cannot be

invoked. In the result, with reference to the two assessment years in question, the Tribunal upheld the view taken by the Appellate Assistant

Commissioner and that is how the first question common to the assessment years 1971-72 and 1972-1973 has been referred to this court.

Learned counsel for the Revenue contended that the Board''s Circular No. 30, dated October 4, 1969, had been superseded by the Board''s

Circular No. 92, dated September 18, 1972, at the time of the completion of the assessments and, therefore, the claim for amortisation should

have been considered and dealt with only on the basis of the directions given in the later circular and not the former one, as done by the Tribunal.

On the other hand, learned counsel for the assessee submitted that the Board''s Circular No. 30, dated October 4, 1969, was in force during the

first day of the relevant assessment years and also throughout the accounting period and also when the films were released and the assessee cannot

be denied the benefit of amortisation as per that circular, though it may be that at the time when the assessments were actually completed, the

earlier circular had been superseded by another. Our attention was also drawn in this connection to the decisions reported in Commissioner of

Income Tax Vs. B.M. Edward, India Sea Foods, , Commissioner of Income Tax Vs. Geeva Films, , Commissioner of Income Tax Vs. N.T.

Ramarao (H.U.F.), and Commissioner of Income Tax Vs. Jyothi Pictures, . Learned counsel also brought to the notice of the court that a SLP

directed against the decision of Commissioner of Income Tax Vs. Geeva Films, in SLP (Civil) No. 1909 of 1980, was dismissed by the Supreme

Court on November 17, 1982, as could be seen from Commissioner of Income Tax, Gujarat-III, Ahmedabad Vs. Ahmedabad Rana Caste

Association, .

There is no dispute that the Board''s Circular No. 30, dated October 4, 1969, was in force during the first day of the relevant assessment years

and also at the time when the pictures produced by the assessee were released. Whether, by reason of the Board''s Circular No. 92, dated

September 18, 1972, the assessee can be denied the benefit of the Board''s prior Circular No. 30, dated October 4, 1969, on the ground that the

assessment relevant to the assessment years in question were completed subsequent to September 18, 1972, is the question. That, in turn, would

depend upon the nature as well as the effect of the circulars issued u/s 119 of the Act. Section 119(1) of the Act empowers the Board to issue

such instructions or directions to the Income Tax authorities as it may deem fit and proper for the administration of the Act and authorities and

other persons engaged in the execution of the provisions of the Act are bound to observe and follow such orders, instructions and directions. The

proviso to section 119(1) of the Act catalogues cases with reference to which such orders , instructioins and direction shall not be issued. Section

119(2)(a) of the Act enables the Board to issue from time to time general or special oeder for the purpose of the proper and efficient management

of the work of assessment and collection of revenue in respect of any class of incomes or class of cases, setting forth directions or instruction (not

being prejudicial to the assessee) as to the guidelines, principles or procedures to be followed by the Income Tax authorities in relation to the

assessment or collection of revenue or the initiation of proceedings for the imposition of penalty and these general or special orders may also be

published and circulated in the prescribed manner for general information in public interest. Section 119(2)(b) contemplates issue of general or

special orders by the Board for avoiding hardship with reference to claims for exemption, deduction, refund or any other relief under the Act after

the expiry of the period specified by or under the Act for making such claims. u/s 119(3) of the Act, the Income Tax Officer is obliged to observe

and follow in the execution of the provisions of the Act such instructions as may be issued for guidance by the Director of Inspection or by the

Commissioner or by the Inspecting Assistant Commissioner within whose jurisdiction he functions. On a consideration of the nature as well as the

purpose for which such directions or orders could be issued by the Board u/s 119 of the Act, we are of the view that though such circulars or

directions are primarily intended to serve as guidelines and are also binding upon the functionaries under the Act in whom the administration of the

Act is vested, yet some concessions, privileges and rights are also made available to the assessees whose assessments have to be dealt with by the

concerned authorities. There may be circulars purely relating to administrative or procedural aspects of the provisions of the Act and there may be

some others conferring certain rights, benefits or concessions on the assessee in regard to assessment. Section 119(2) of the Act declares that such

general or special orders or directions or instructions, not being prejudicial to the assessee, may be given with reference to the guidelines, principles

or procedures to be followed and such directions or instructions conferring rights, benefits or concessions on the assessee cannot be prejudicially

erased by the recall or withdrawal or supersession of any particular circular, the benefits of which are available to the assessee during the relevant

years in question. We may also usefully refer in this connection to the views expressed in the Law and Practice of Income Tax by Kanga and

Palkhivala, Seventh Edition, Volume I, page 83, where it has been pointed out that the law to the applied is that in force in the assessment year,

unless otherwise stated or implied and that the provisions of the Act as they stand amended on the 1st of April of a financial year must apply to the

assessment for that year. If this be the position with reference even to amendments in the Act, we do not see any reason as to why that cannot be

regarded as applicable even in respect of the directions and instructions issued by the Board u/s 119 of the Act and intended for the benefit of an

assessee.

We may now refer to decisions to which our attention has been drawn. In Commissioner of Income Tax Vs. B.M. Edward, India Sea Foods, ,

the assessee was a partner in two firms in one of which his wife was also a partner. For the assessment year 1971-72, the business of the firm in

which the assessee''s wife was a partner ended in a loss and in the assessment for the earlier years, the income of the wife from the firm of which

she was a partner along with her husband, was included in the assessee''s income and assessed u/s 64 of the Act. The assessee claimed that in

respect of the assessment year 1971-72, the loss incurred by, or debited to, his wife, should be set off against his other income and that was

disallowed by the Income Tax Officer as not permissible u/s 64 of the Act, as it contemplated the ""income"" of a spouse and not loss. This view

was not, however, accepted by the Appellate Assistant Commissioner on the footing that a circular of the Board u/s 5(8) of the Indian Income Tax

Act, 1922, allowed the loss suffered by a spouse to be set off against the income of the other spouse, though that circular was withdrawn at a point

of time after the expiry of the assessment year 1971-72 and the assessment itself was completed after the withdrawal of the circular. The Tribunal

also found that though the circular had been withdrawn at the time of the assessment, it was in operation at the commencement of the assessment

year and the circular was binding upon the authorities. On a reference, a Full Bench of Kerala High Court held that having regard to the scope,

effect and the purport of the circular and particularly to the fact that the circular was in force and operation throughout the assessment year 1971-

72 and was withdrawn only on April 6, 1972, the assessee was entitled to have an assessment made and completed in accordance with the

circular. In this case also, during the entirety of the assessment years 1971-72 and 1972-73, the circular was in operation and was withdrawn only

on September 18, 1972, and, as such, the principle laid down in the decision referred to would be applicable. Again, in Commissioner of Income

Tax Vs. Geeva Films, , this principle was reiterated following Commissioner of Income Tax Vs. B.M. Edward, India Sea Foods, . We may also

notice here that the SLP filed against the decision in Commissioner of Income Tax Vs. Geeva Films, in SLP (Civil) No. 1909 of 1980, was

dismissed by the Supreme Court on November 17, 1982, as could be seen from Commissioner of Income Tax, Gujarat-III, Ahmedabad Vs.

Ahmedabad Rana Caste Association, . In Commissioner of Income Tax Vs. N.T. Ramarao (H.U.F.), , the assessee, whose accounting year

corresponded to the calendar year, released a film in October, 1970, and claimed the entire cost of production of the film as deduction for the

assessment year 1971-72. During the accounting year relevant to the assessment year 1972-73, the assessee purchased the rights of exhibition of

a film and released the film in December, 1972, and claimed the cost of lease of rights as deduction for the assessment year 1972-73 based on the

circular of the Board dated October 4, 1969. The Income Tax Officer applied circular No. 92, dated September 18, 1972, which was also

subsequently further modified and restricted the allowance on a graded scale related to the cost of production and this was also confirmed on

appeal. But the Tribunal held that the assessee was entitled to 100% deduction on the basis of Circular No. 30, dated October 4, 1969, was

admittedly in force during the assessment years in question corresponding to January 1, 1970, to December 31, 1971, and it was, therefore,

applicable and the assessee was entitled to the benefit of deduction of the entire cost of production of the film as well as the cost of purchase of

lease rights. This decision also, in our view, clearly supports the stand taken by the assessee. In Commissioner of Income Tax Vs. Jyothi Pictures, ,

the assessee, who was engaged in the production, sale and distribution of films, produced a film at a cost of about 3.75 lakhs of rupees and

released the picture in June, 1972. The accounting year followed by the assessee closed on September 30 of that year and the assessee wrote off

the entire cost of the picture and claimed deduction of the entire cost under Board''s Circular No. 30 dated October 4, 1969. However, the

Income Tax Officer took the view that the Board''s Circular No. 92, dated September 18, 1972, applied and the assessee was therefore, entitled

to write off only 50% of the cost of production and the balance in the next year. But the Tribunal upheld the contention of the assessee. On a

reference, it was held that Board''s Circular No. 92 dated September 18, 1972, was issued even during the currency of the assessee''s accounting

year relevant to the assessment year 1973-74 and as the revised Circular No. 92, dated September 18, 1972, was in force on the first day of the

assessment year concerned, that world govern the case. It was also further pointed that what is relevant is the assessment year and as the circular

was in force on the first day of the assessment year, it would apply to that assessment year. From this decision also, it follows that if a circular was

in force on the first day of the assessment year, the benefit there of should be made available to the assessee. In this case, as noticed earlier,

Board''s Circular No. 30, dated October 4, 1969, was in force on the first day of the relevant assessment years 1971-72 and 1972-73. We are,

therefore, of the view that the Appellate Tribunal was quite right in holding that the assessee was justified in writing off the entire cost of production

in accordance with the Board''s Circular No. 30 dated October 4, 1969, though the assessments are made after the coming into force of Board''s

Circular No. 92, dated September 18, 1972. We, therefore, answer the first question referred to us in the affirmative and against the Revenue.

We may now proceed to consider the second question referred in relation to the assessment year 1973-74. That pertains to the allowance of

cost of positive prints in respect of the feature film, Shadi Ke Baad. Though, before the Income Tax officer, the assessee claimed the entire cost of

Rs. 13,67,675 as admissible, this was not accepted and only the difference between the cost and the difference of Rs. 3,92,273 was added as the

value of the closing stock. In the course of appeal before the Appellate Assistant Commissioner, the assessee exercised an option under rule

9A(11)(a)(ii) of the Income Tax Rules, 1962 (hereinafter referred to as ""the Rules""), and maintained that though the amount of Rs. 13,67,675

included the cost of positive prints also but did not include any expenditure in connection with advertisement after the film was certified for release

by the Board of Film Censors, the entire amount was deductible. The Appellate Assistant Commissioner was of the view that for purposes of

deduction, even the cost of positive prints in computing the total income will have to be deducted and the Income Tax Officer was directed to

allow the entire amount of Rs. 13,67,675 as deduction and to modify the computation of the total income accordingly. The Tribunal, however, held

that it was not clear from the order of the Appellate Assistant Commissioner as to how much was incurred by the assessee for making positive

prints, but, nevertheless, such expenditure is allowable u/s 37 of the Act and remitted the matter to the Income Tax Officer to find out the amount

incurred for making positive prints and it was also further directed that if such cost was incurred during the assessment year 1973-74, that had to

be allowed in that year.

Learned counsel for the Revenue Contended that in view of the option exercised by the assessee under rule 9A(11)(a)(ii) of the Rules, the cost

of positive prints cannot be included in the cost of production and further that if that item of expenditure cannot be taken into account under rule

9A of the Rules, it is not open to the Tribunal to allow such expenditure as a permissible deduction u/s 37 of the Act. Reference was made in the

connection to the decisions in Commissioner of Income Tax, Madras Vs. Modern Theatres Ltd., and Commissioner of Income Tax Vs.

Carborundum Universal Ltd., . However, learned counsel for assessee submitted that the expenditure incurred by the assessee in obtaining positive

prints is really in the nature of post production expenditure and cannot be properly included in the cost of production within the meaning of rule 9A

of the Rules and that in the absence of any provision in the Act of the Rules disallowing such expenditure and also a non obstante provision in rule

9A of the Rules, relief with reference to the expenditure incurred in obtaining positive prints cannot be denied to the assessee.

Only during the course of the pendency of the appeal before the Appellate Assistant Commissioner, the assessee exercised an option as per rule

9A of the Rules and under Explanation (ii)(a) to rule 9A(1) of the Rules, the expenditure incurred for the preparation of the positive prints of the

film could not be included within the expression ""cost of production"". It is for this reason that such expenditure is characterised as post-production

expenditure. Ordinarily, all expenditure incurred on the production of a film would be its cost of production, but that would include the expenditure

incurred for the preparation of the positive prints of the film so produced. The purpose of obtaining positive prints is to exhibit the film produced

which is a stage after the completion of the production. In any given case, a person carrying on business in the production of feature films may

produce a film, but for a variety of reasons, he may not be in a position to exhibit it by obtaining positive prints. Having produced a film, the person

carrying on the business of production of feature films may either keep them without exhibition or even part with them without making arrangements

for their exhibition. It cannot, therefore, be assumed that in all cases of production of a film, the producer must necessarily obtain the positive prints

of the film as well. In other words, if a person carries on the business of production of films, he may not only produce the films but also prepare the

positive prints for the purpose of exhibition or he may not take steps for the exhibition of the film having produced it. The production and exhibition

of a feature film constitutes two distinct and separate stages and while the former would take in all activities which culminate in the production of a

feature film, the latter contemplates a stage subsequent to the completion of the production of the film, viz., exhibition of the film produced. Viewed

thus, any expenditure incurred in connection with the preparation of the positive prints for purposes of exhibition would really be post-production

expenses and also an item of expenditure in relation to business of production and exhibition of feature films and would, therefore, quality for

deduction as expenditure laid out or expended wholly and exclusively for the purpose of the business. We have not been referred to any provision

in the Act or the rules disallowing such expenditure as an item of business expenditure for the purpose of section 37 of the Act. Though learned

counsel for the Revenue placed considerable reliance upon the decision in Commissioner of Income Tax Vs. Carborundum Universal Ltd., , we

are of the view that decision does not in any manner assist the Revenue. In that case, the assessee claimed deduction of a certain amount in the

computation of its profits and gains of the business by way of contribution to the superannuation fund of its foreign collaborators and that claim was

disallowed by the authorities below. However, the Tribunal held that though that amount was not an allowable deduction u/s 36(1)(iv) of the Act as

the contribution was not to a recognised provident fund or to an approved superannuation fund nor could be allowed u/s 37 of the Act, the

payment was allowable u/s 28 of the Act. On a reference, it was held that the nature of payment being one described in section 36(1)(iv) of the

Act and as it could not be deducted under the section, it could be held to be deductible u/s 28 of the Act on general principles in arriving at the true

profits and gains of the business in a commercial sense. In the view we have taken that the expenditure incurred in connection with the obtaining of

positive prints is really in the nature of post-production expenditure and that there is no provision in the Act or the rules obliging the authorities to

disallow such expenditure, the claim of the assessee that such expenditure would fall u/s 37 of the Act is, in our view, well-founded. We, therefore,

answer the second question referred to us in the affirmative and against the Revenue.

We, however, do not make any orders as to costs in there references.