Commissioner of Income Tax vs Sankarapandia Asari and Sons

M.N. Chandurkar, C.J.—The question which has been referred in T.C. Nos. 297 and 298 of 1978, at the instance of the Revenue, is as

follows :

Whether, on the facts and in the circumstances of the case, the amounts of Rs. 1,83,250 and Rs. 3,90,326 claimed by way of amortisation were

proper deductions for the assessment years 1971-72 and 1972-73 ?

There are also other questions which have been referred to this court u/s 256(2) of the Income Tax Act, 1961, in T. C. Nos. 995 and 996 of

1980, arising out of the same order of the Tribunal. The questions are as follows :

Whether the Appellate Tribunal''s finding that the assessee had adopted the practice of writing off the value of the entire cost of the distribution

rights of the film in the year of acquisition and valued the closing stock as ''nil'' is based on the facts found in this case and is sustainable in law ?

Whether the Appellate Tribunal''s finding that the method of writing off the cost of the distribution rights in the year of acquisition itself is a

proper method of accounting and that profits can be rightly deducted therefrom is proper and is reasonable on the facts found in this case ?

Both these questions will stand answered by the view we take on the question in T. C. Nos. 297 and 298 of 1978.

It has to be pointed out that in so far as the same assessee is concerned, a similar question came to this court in the form of a reference in

Commissioner of Income Tax, (Central) Madras Vs. K. Sankarapandia Asari and Sons, . The reference in the instant case is for the assessment

years 1971-72 and 1972-73. The assessment year in the reported decision was 1970-71. The assessee has been consistently adopting a method

of writing off the cost of acquisition of the rights of film distribution in the year of acquisition irrespective of the year of release and valuing the

closing stock as ""nil"". This method was adopted right from the year 1965 when the assessee started its business of distribution of films up to the

assessment year 1969-70. However, for the assessment year 1970-71, the Income Tax Officer did not accept this method and in accordance with

a circular issued by the Board, he took the view that full amortisation was allowable in respect of films which had been released in the first six

months of the accounting year and at half the rate only in respect of films which were released during the second half of the accounting year. He

also held that no amortisation was allowable in respect of films which had not been released in the year of account. The Appellate Assistant

Commissioner took the view that the assessee would be entitled to full amortisation in respect of the films which were released during the

accounting year irrespective of the date of the release but was not entitled to any amortisation in respect of those films which were acquired during

the year but not released. The Tribunal, however, held that the assessee had been adopting a consistent method of accounting in which it was

writing off the entire cost of the distribution rights in the year of acquisition and this had been accepted by the Department up to 1969-70 and as

the Department had not shown that this method was such that the profits and gains could not be properly deducted therefrom, the assessee was

entitled to amortisation even in regard to those films which had been acquired, but which had not been released during the year. The assessee''s

claim for amortisation was thus accepted in full. The Revenue brought the controversy by a reference to this court. This court held that though the

method of writing off in the year of release of the picture or the elapsing of a particular period from the date of release in order to write off the

entire value of acquisition was a proper method, that did not mean that it was wrong in principle to write off the value of the acquisition in the year

of acquisition itself. This court then observed as follows (p. 544) :

Nor can we say with definiteness that by adopting such a method, the profits and gains cannot properly be deducted therefrom. We have also to

keep in mind that while section 145 enables the ITO not to accept the method of accounting of the assessee if he was of the opinion that the

method employed is such that the income cannot properly be deducted therefrom, there is no power in the ITO to impose his own method. As

already stated, the assessee was adopting the practice of writing off the entire cost of distribution rights in the year of acquisition and that was

accepted by the Department in the previous years. As rightly pointed out by the Tribunal, it has not been established that the method of accounting

regularly followed by the assessee in the past is such that the income, profits and gains cannot properly be deduced therefrom.

This court, therefore, answered the reference against the Revenue.

The question which is referred in the present reference is also identical. What is contended by learned counsel for the Revenue is that when the

Board has prescribed that amortisation in full may be permitted where the film is released in the first half of the accounting year and amortisation at

half the rate would be permissible if the film is released in the other half year, the circular purports to grant a concession and the assessee cannot

claim amortisation on any other basis. Now, the circular by the Board would be in the nature of an ad hoc direction to the Income Tax Officer.

That circular has no statutory basis. We are more concerned in these references with the finding recorded by the Tribunal where the Tribunal has

clearly observed that it cannot be stated that the profits of the assessee during the period cannot be ascertained properly from the method followed

by him. Indeed, in so far as the method of accounting adopted by the assessee is concerned, that method has received the express approval of this

court in Commissioner of Income Tax, (Central) Madras Vs. K. Sankarapandia Asari and Sons, . In so far as the assessee is concerned, we must,

therefore, take it as a settled proposition that the method adopted by the assessee is such that on the basis of this method, the profits can be

properly ascertained. This will rule out the applicability of the provisions of section 145 of the Income Tax Act, 1961. In so far as the present

assessee is concerned, therefore, we must take it that the matter stands concluded for the relevant assessment years also.

Accordingly, all the three questions are answered in favour of the assessee and against the Revenue. The Revenue to pay the costs of this

reference. Counsel''s fee Rs. 500 one set.