Commissioner of Income Tax, Madras vs Modern Theatres Ltd.

Jagadisan, J.—In T. C. No. 90 of 1960 the following questions have been referred to us u/s 66 of the Indian Income Tax Act at the instance

of the Commissioner of Income Tax, Madras :

Whether the sum of Rs. 3,53,863 claimed by the assessee as the cost of the positive prints of the two films aforesaid is deductible in the

assessment in whole or in part independent of amortisation ?

Whether the sum of Rs. 4,000 or any part thereof was in law due to the assessees lawyers on the basis of the directors resolution dated June

30, 1956 (annexure ""B"" aforesaid) so as to constitute a deduction in the assessment of the year 1957-58 ?

The question that has been referred to us at the instance of the assessee in T. C. No. 119 of 1962 is as follows :

Whether, on the facts and in the circumstances of the case, the Income Tax Officer was justified in applying the proviso to section 13 of the Indian

Income Tax Act.

The assessee is a public limited company carrying on business as producers and distributors of films. During the year ended September 30,

1956, the previous year of for the assessment year 1957-58, it produced and released two films called ""Maheshwari"" and Alibaba and Forty

Thieves."" The first of these two films was released on November 13, 1955, and the second on January 12, 1956. A number of positives were

taken from the negatives of these films and they were distributed simultaneously with the release. The cost of production up to the stage of

negatives and the cost of positives of these films are as follows :

Name of the picture Date of release Cost of production up Cost of Total

to negative stage positives

(1) (2) (3) (4) (5)

Rs. Rs. Rs.

Maheshwari Alibaba 13-11-1955 3,08,557 54,496 3,63,053

and Forty Thieves

Forty Thieves 12-1-1956 4,96,643 2,99,367 7,96,010

Total 8,05,200 3,53,863 11,59,063

These positives were distributed for screening and exploitation even during the first half of the accounting year. The total cost of positives

amounting to Rs. 3,53,863 was claimed as deduction in the computation of the profits and gains of the business for the assessment year 1957-58.

The Income Tax Officer disallowed the claim. He was of the opinion that the cost of preparing the first positive prints before releasing the picture

should be merged in the cost of the production of the negative. According to the Income Tax Officer the expenditure incurred in preparing the

positive prints which are first released should be treated as capital expenditure in respect of which amortisation can be claimed in accordance with

the circular of the Central Board of Revenue and not as a revenue expenditure.

Any expenditure incurred subsequently for replacing any of the positive prints may, however, in the opinion of the Income Tax Officer, constitute

a revenue expenditure, as that is expenditure incurred for replacing the damaged positive prints. Under the Board of Revenue circular amortisation

at the rate of 60% can be claimed by the assessee in the first year of exhibition and this 60% would be available only if the film had run for 365

days, that is, throughout the year. If the film had not been exploited for the whole of that year proportionate amortisation based on ""time basis

would only be allowed. We shall refer to the details of the circular a little later. Adopting therefore this basis of amortisation of 60% on ""time basis

for the first year of exhibition, the Income Tax Officer made the following computation of allowance in respect of these films.

The film ""Maheshwari"" had run 323 days in the year of account. What was therefore allowed by way of amortisation was 323/365 of 60% that

is, 53% of the total cost of production, which is the aggregate of cost of production up to the negative stage and cost of positive prints. The total

cost of production of ""Maheshwari"" being Rs. 3,63,053, 53% of this was allowed as amortisation. This work out to Rs. 1,92,417. Deducting this

Rs. 1,92,417 from the total cost of Rs. 3,63,053 the closing stock value of Rs. 1,70,636 was arrived at. The assessee had shown the closing

stock value as Rs. 1,38,851. The difference between these two values, namely, Rs. 31,785, was directed to be added back to the income

returned by the assessee. Similarly, in respect of the film ""Alibaba and Forty Thieves"", amortisation was worked out at 43%. This was on the

footing that the film having been released on January 12, 1956, was screened for 266 days between January 12, 1956, and September 30, 1956.

43% represents 266/366 of 60%. The closing stock value arrived at by the officer was Rs. 4,53,730 as against the value of Rs. 2,73,154 fixed by

the assessee. The difference between the two valuations, namely, Rs. 1,80,576, was directed to be added back to the income returned by the

assessee.

The assessee claimed by way of deduction a sum of Rs. 10,000 paid as remuneration to its legal advisers at Salem. The assessee was paying its

legal advisers retainer of Rs. 4,000 for each calender year. The payment for the calender year 1955 was made on December 12, 1955. By a

directors resolution dated March 30, 1956, it was resolved that the legal advisers should be paid a monthly salary of Rs. 500. A time scale of

salary was fixed (Rs. 500-50-750) and this was to take effect from October 1, 1955. In pursuance of this resolution the following payments were

made :

Rs.

03-05-1956 3,500

01-06-1956 500

30-06-1956 500

01-08-1956 500

31-08-1956 500

29-09-1956 500

Total 6,000

The assessee claimed that this sum of Rs. 6,000 along with Rs. 4,000 paid on December 12, 1955, should be deducted in computing the profits

of the business. The Income Tax Officer observed that the resolution of the directors did not suggest that the fee of Rs. 500 per mensem was in

addition to the sum of Rs. 4,000 that was being paid every calendar year, and that therefore the claim for Rs. 4,000 made by the assessee was not

tenable. He therefore allowed Rs. 6,000 and disallowed the sum of Rs. 4,000. This amount was added back to the returned income.

The assessee preferred an appeal to the Appellate Assistant Commissioner. Several points were raised in the appeal but we are now concerned

only with the two items : (1) Addition of Rs. 2,12,361 to the closing stock value and (2) Rs. 4,000, legal fees, disallowed by the officer. The

Appellate Assistant Commissioner held that there was no reason to ignore the method of accounting regularly followed by the assessee and

accepted by the department in the previous years of assessment, that the Income Tax Officer went wrong in merging the cost of the positive prints

with the cost of the negative, as the life of the negative is normally a period of three years while the life of the positive prints is much shorter as they

exhaust themselves after 250 or 300 shows. The appellate authority referred to the opinion of technicians in the matter and reached the conclusion

that the life of positive prints does not exceed 300 shows under the best conditions and ordinarily it does not exceed 200 shows. As the assessee

in this case had released the positive prints for exhibition even during the first half of the accounting year, an inference was drawn by the Appellate

Assistant Commissioner that these positive prints would have become scrap by the end of the accounting year; he held, therefore, there was no

justification for the officer to enhance the stock value given by the assessee. In the result, the Appellate Assistant Commissioner deleted 2,12,361

to the stock value. Dealing with the disallowance of Rs. 4,000 by the Income Tax Officer the Appellate Assistant Commissioner observed that the

total amount of Rs. 10,000 having been paid by the company to the legal advisers, the whole of it would be permissible deduction as otherwise the

result would be that the remuneration paid between January 1, 1955, and September 30, 1955, would not come in for deduction at all. He

therefore directed the deletion of the addition of Rs. 4,000.

The department preferred an appeal to the Appellate Tribunal. The Tribunal agreed with the Appellate Assistant Commissioner that it would not

be correct to equate the life of the positive to that of the negative. But, in the view of the Tribunal, it would not be proper for the assessee to claim

the entire cost of the positives merely because the positives were screened even during the first half of the accounting year. In substitution of the

mode of amortisation claimed by the assessee, the Tribunal observed that the value of the positive can be written off completely only after 150

shows. The Tribunal states in its order : ""A more reasonable basis would be to write it off completely after 150 shows. Where the number of

exhibitions are less than 150, the value of the positives should be shown as cost in the closing stock. This would, in our opinion, be a sound

working principle. The Income Tax Officer was directed to recompute the depreciation on the above principle. The claim for the allowance of Rs.

10,000 paid to legal advisers by the assessee was considered by the Tribunal, and the conclusion it reached was that the Income Tax Officer was

right in disallowing the sum of Rs. 4,000. The Tribunal took this view on the short ground that the payment of Rs. 4,000 was not in relation to the

year of account. As stated already the year of account is that ending with September 30, 1956, and the payment of Rs. 4,000 related to the whole

of the calendar year 1955; the nine months between January and October, 1955, were not within the accounting year. It is from this decision of the

Tribunal that the three questions arising in the two tax cases set out above have been referred to us.

The question referred in T. C. No. 119 of 1962 overlaps to some extent question No. 1 referred to in T. C. No. 90 of 1960. The assessee

challenges the right of the department to disregard the method of accounting adopted by it all these years and to substitute another method for little

or no reason. But the contention of the department is, which however is not reflected in the order of the Tribunal, that the proviso to section 13 of

the Act is applicable, because the true profits and gains of the assessee are not deducible from the system of accounting maintained by the

assessee. It must be observed that the department has not claimed, and indeed it cannot claim, to discard the method of accounting regularly

employed by the assessee contrary to the mandatory terms of section 13. We have, therefore, to deal with the question in T. C. No. 119 of 1962

and question No. 1 in T. C. No. 90 of 1960 together and give our answer.

Before dealing with the questions, we would like to preface our judgement by a broad consideration of the essential and relevant features

relating to the deduction of cost of production of the negative film and the positive prints by way of allowance for amortisation with special

reference to the circular issued by the Central Board of Revenue. In the hands of a producer and distributor, a film is neither a fixed nor a

circulating capital. Fixed capital is that which is that which is laid out in the fixed plant, whereby the opportunity of making profits and gains is

secured and circulating capital is that which is turned over and over in the course of the business which is carried on (Mallett v. Staveley Coal and

Iron Co. Ltd.). Circulating capital is a capital which is turned over and in the process of being turned over yields profit and loss. Fixed capital is not

involved directly in that process and remains unaffected by it (Van den Berghs Ltd. v. Clark). This description of the two kinds of capital has been

accepted as sound law in Income Tax cases. In Reynolds & Gibson v. Crompton Jenkins L. J. however observed that the distinction between the

two is debatable. The learned Lord Justice states :

...circulating capital is simply an expression used to denote capital expended in the course of the trade with a view to disposal at a profit of the

assets produced or acquired by means of such expenditure...

In any view of the matter a film is not a capital asset. It resembles more a trading stock than a capital structure. The department also does not

treat it as a capital. The terms of the Central Board of Revenue circular clearly emphasises that the amortisation allowances permitted is not in the

nature of a depreciation allowance of a capital. The value of the capital does not enter the trading account. But the depreciation allowance on a

capital asset is charged on the revenue receipt. The cost of production of the negative of a film is debited in the trading account. At the end of the

accounting year the value of the film is estimated as 40% of the original cost and this 40% value is brought on the credit side as the closing stock

value. The result is that the assessee producer gets 60% amortisation allowance for the first year. In the next accounting year, the second year of

the life of the film, the opening stock value of the film which is the closing stock value of the prior accounting year, enters the debit side of the

trading account. At the end of that accounting year the closing stock value of the film is taken as 15% of the original cost and is brought on the

credit side. The assessee thereby obtains 25% amortisation allowance. In the subsequent accounting year, the third year, the closing stock value of

the preceding year is the opening stock value. This is only 15% of the cost, that which remains after two amortisation allowances of 60% and 25%.

In that year the closing stock value is taken as nil, so that the assessee gets the full allowance of the debit of the opening stock value. The scheme

of the amortisation allowance distributed over a range of three years, 60% for the first year, 25% for the next year and 15% for the third year, is

based upon the prevalent view, which is quite in accord with practical knowledge and experience, that the normal span of life of a film negative is

three years and is seldom more. What we mean by ""life"" is not its physical existence or preserving strength but its potentiality as nucleus of income.

A film which is screened to empty houses is of no value and deserves the epithet of ""living corpse.

Now we shall refer to the circulars of the Central Board. The first circular is dated May 13, 1937, and is in these terms :

The Central Board of Revenue has decided that films in the hands of their producer and of their purchaser should be treated as stock-in-trade. In

arriving at the closing stock valuation the assessees figure should be accepted if it appears reasonable. In this connection it should be borne in mind

that since our rates are on a sliding scale and losses are not allowed to be carried forward an assessee may be tempted to manipulate this figure.

As a general rule the greatest deterioration in the value of a film takes place in the first year. The Income Tax Officer will have to decide for himself

what figures to adopt in such a case since the life of a film is subject to great variation. It has been suggested that a film may be valued at 40 per

cent of its cost after one year, 15 per cent after two years and thereafter nothing. The actual percentages that should be adopted in the case of

each film are however matters that must be decided on the merits of each case and no hard and fast rates can be laid down.

There was a second circular dated January 4, 1951, and that reads :

On representations made by the film industry, the Board wish to make it clear that the general or standard formula regarding amortisation of the

cost of production of a film, at 60 per cent in the first year 25 per cent in the second year and 15 per cent in the third year should not be treated as

inflexible and that it may be varied in favour of the assessee if he is able to prove by adducing appropriate evidence that the earning capacity of the

film was extinguished much earlier than over the period presumed in the above formula. If, for example, an assessee is able to prove that the film

had no real life beyond the first year and there were no receipts in respect thereof in the next year, the entire cost of the film should be allowed in

the first year.

It should, however, be carefully noted that the percentages mentioned in the standard formula are percentages to be allowed strictly on time

basis, for any other method may open the way for tax evasion. A person may purchase a film towards the end of the year and claim to be allowed

60 per cent of the amount in that very year. safeguarding such possibilities, the rates of 60 per cent, and 25 per cent should be treated as rates per

annum. If, for example, the accounting year of a film produced is the year ended December 31, 1947, and a film produced during that year came

to be exhibited on October 1, 1947, the allowance for amortisation should be as follows :

Accounting year Rate of amortisation

1947 15% (1/4 of 60%)

1948 45% (3/4 of 60%) plus 6 1/4% (1/4 of 25%)

1949 18 3/4% (3/4 of 25%) plus 3 3/4% (1/4 of 15%)

1950 11 1/4% (3/4 of 15%).

The proper interpretation and effect of those two circulars can be briefly summarised thus. A film is a stock-in-trade. Its value is to be brought

in and dealt with in the trading account. Under the normal accountancy principles and commercial practice the closing book value of any stock-in-

trade on hand at the end of the accounting year is either the actual cost or market value whichever is the lower. By ""market value"" is understood

the selling price in the open market at the date of the valuation. But in regard to a film neither of these two things would be practicable. If the actual

cost is adopted the assessee gets no deduction or allowance. The market value of any film cannot be ascertained with case or certainly and such

value cannot be fixed without controversy or speculation. So a rough and ready method is prescribed. For the first year it is 40%; the second year

15% and the third year nil. This is not a rule of thumb or any hard and fast rule. It may vary, be more or less in each year depending upon the

popularity of the film amongst the public at large. The greater the public fascination and the greater the income, the larger the depletion of the life of

the film. The amortisation rate is on the time basis. An assessee cannot release a picture on the date prior to the last day of the accounting year and

claim 60% amortisation. A ""year"" is taken as 365 or 366 days and if the film is released 183 days before the expiry of the accounting year

amoritsation that would be allowed is 183/365 of 60%, that is, 30%.

No discussion on this question of the proper rule of amortisation of the negative of a film would be complete if we were not to refer to the

decision of this court in Gemini Pictures Circuit Ltd. v. Commissioner of Income Tax. The assessee in that case was a company carrying on

business as producer, distributor and exhibitor of motion picture. A motion picture was produced and released for public exhibition on October

21, 1949. The assessee treated ""the year"" not as a period of 12 months, but as its accounting year, and claimed the full allowance of 60% for the

year 1949, though the film had run only for about 72 days in that year. The Income Tax Officer disregarded this method of valuation and adopted

the strict time basis rule in the Central Board circular. He treated the firm as suffering depreciation of 60% at a uniform rate for a period of 12

months and as the film had run only for 72 days out of 365 days he allowed only 72/365 of 60% of the cost, namely, 12%, and took 88% as the

value of the film at the end of 1949. The Appellate Assistant Commissioner on appeal held that the method employed by the assessee was such

that its true income, profits and gains could not be deduced therefrom and confirmed the valuation of the officer. A further appeal to the Tribunal

was unsuccessful. There was a reference to this court, and the following question of law : ""Whether in view of the uniform and consistent methods

adopted by the assessee and accepted by the Income Tax authorities in previous years of valuing the films at 40% of the cost in the first year in

which the same was released for public exhibition, the Income Tax authorities are entitled to change the said methods and value the film at cost

reduced by a sum calculated on time basis at the rate of 60 per cent for the first twelve months of public exhibition ?"" was referred. It was held by

a Bench of this court that the method employed by the assessee of treating the year for the purpose of calculating the allowance for amortisation of

films as any period of whatever duration ending with its accounting year was not one which reflected the true income or profits of the company and

that the department was right in rejecting the method of accounting regularly employed by the assessee. It was further held that the rate of

depreciation was not constant but was progressively diminishing and therefore the unqualified ""time basis"" rule adopted by the Income Tax Officer

in computing the allowances did not truly reflect the profits of the year and could not be upheld. As the figures of collection for three years were

available in that case a method of calculating the allowances for amortisation was indicated. At page 563, Rajagopala Ayyangar J., as he then was,

observed as follows :

In order to arrive at a just estimate of profits, any computation of the amortisation rate must take into account the actual collections from the film

during the period of its normal life the depreciation allowance must be computed with that at least as one of the relevant integer. In our judgment

the proper method of calculation would have been to take the total revenue from the film for the three-year period-for the life of the films we are

concerned has been taken as of that duration - as one of the factors from which the percentages of the depreciation should be worked out.

We understand this decision not as laying down any definite code to be adopted in fixing amortisation rates of allowances. Rather it was a

decision on the question, what was the true profits assessable to tax on the facts of the case. There can be no one standard or formula to ascertain

the real income and what was done in that case can afford no guidance nor be treated as a judicial precedent in another case, widely different and

distinctly remote from that case.

We wish to point out that the subject-matter of amortisation allowance in the Gemini''s case was the negative film. Further, the details of

income for three years were available. The learned judge however observed that the principle of amortisation would be the same even if the

assessment were to be made only on the date of one years income. Rajagopala Ayyangar J. observes :

There should however be no difficulty in applying the formula even if the first years collections only are known. The nature of the fall in collections

even during the year ought to afford some indication whether the picture in question does or does not conform to the norm of the three year life.

It is clear that Gemini''s case interprets the Central Board circular as not laying down the proportion of amortisation of 60%, 25% and 15% for

the three successive years in the nature of the law of the Medes and the Persians but only as a working rule provided it is conducive to ascertain

the true profits and gains. With this view we respectfully agree.

What we are concerned with in this case is the cost of positive prints. The assessee incurred the cost of Rs. 3,53,863 for making such prints in

respect of the two films. These were screened for more than six months during the accounting year. It is not disputed that the prints were available

at the time of the release dates, November 13, 1955, and January 12, 1956, of the films. In fact that is the reason which induced the Income Tax

Officer to merge the cost of positive with the negative and to apply the formula of the Central Board circular. The finding of the Appellate Assistant

Commissioner, that the life of positive print does not exceed 300 shows is based upon the certificate of technicians in this field of business, and has

not been challenged before us. Calculating at the rate of 2 shows per day 300 shows would be completed in five months, certainly within six

months. In all probability a positive print cannot maintain any utility at the end of six months after the commencement of its screening career. A

hypothetical case of a print remaining idle in the hands of an exhibitor for six months or not completing 300 shows within that period may arise. But

it is such a remote possibility and a rate phenomenon that it can be left out of account adopting a six months period as being equivalent to 300

shows. There may also be a freakish case of a particular print yielding more than 300 shows. That again is an exception which cannot derogate

from the norm. If therefore a positive gets exhausted in six months, and that period of six months falls within the accounting year of the assessee, it

would not be fair to the assessee to compel him to attribute a value to it at the end of the year including it in the closing stock. The closing stock

value must be nil on the hypothesis that the positive print is a mere junk after a six-months user.

Learned counsel for the department contended that even positive prints can be written off in value only at the amortisation rates spread over

three years as prescribed by the central Board circular. This is an impossible and an untenable contention. The circular is inapplicable to prints, in

the very nature of things. Undoubtedly, the cost of positive should be written off after 300 shows if not earlier. There can be no question of

percentage amortisation in respect of a positive print where there is proof or where it can be safely presumed that 300 shows were got from the

print within the accounting year.

Bearing the above principles in mind, we shall now proceed to deal with the questions referred. The claim of the assessee is to have the total

cost of positives, Rs. 3,53,863, allowed as a revenue expenditure. Treating them as stock-in-trade if they cease to have any value at the end of the

year, the claim must be upheld. Till September 30, 1955, the assessee claimed as expenses the entire cost of positives, exhibited for more than six

months in the accounting year and the rest, which had not been screened for the full six months, were treated as stock-in-trade at their full value,

independent of the cost of production amortised under the prescription of the Central Board. This was the settled and uniform method of

accounting adopted by the assessee all along. In the assessment year 1953-54 the assessee, however, claimed the whole outlay on positives as

revenue expenditure irrespective of the duration of screening but this was disallowed by the department. The assessee was therefore left to the

method of accounting which it had been consistently adopting.

Now the question is whether the department has violated the provisions of section 13 of the Act in disallowing the claim of the assessee.

Section 13 reads :

Method of accounting. - Income, profits and gains shall be computed, for the purposes of section 10 and 12, in accordance with the method of

accounting regularly employed by the assessee :

Provided that, if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income Tax

Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such

manner as the Income Tax Officer may determine.

Section 13 is emphatic and assures the assessee the right to have his own method of accounting. The logical corollary of that provision is that

the department cannot impose another method of accounting different from the assessees method on grounds of convenience, expediency or the

like. This principle of non-interference with the method of accounting regularly adopted by the assessee is stated quite clearly by the House of

Lords in Duple Motor Bodies Ltd. v. Ostime. That case dealt with an assessee which was a company carrying on business as builders of motor

bodies. Since 1924 the company used the direct cost method of ascertaining the cost of work-in-progress under which the cost of direct materials

and labour were alone taken into account. Assessment to Income Tax was made upon the company under Case I of Schedule D for the

assessment years 1951-52, 1952-53, 1953-54, on the footing that the cost of work-in-progress should be arrived at by the ""on cost"" method

under which a proportion of indirect expenditure, that is, factory and office expenses, etc., was added to the direct cost. On appeal the Special

Commissioners found that the accountancy profession was satisfied that either method would produce a true figure of profit for Income Tax

purposes, and that which method should be used was a matter of policy for the decision of the directors of a company. The Commissioners

decided however that in order to arrive at a true figure of the cost of work-in-progress, a proportion of factory overheads but not of other indirect

expenditure should be taken into account. It was held that the facts and findings in the case did not justify requiring the company to change from its

practice of using the direct cost method. At page 572 Lord Reid observed thus :

... if a method has been applied consistently in the past, then it seems to follow that it should not be changed unless there is good reason for the

change sufficient to outweigh any difficulties in the transitional year.

The true question which is very often blurred and lost sight of is not the propriety of the system of accounting which an assessee might have

been following, but the ascertainment of true profit. Pearce L. J. observes at page 562 :

The result has been that the ascertainment of the particular profits for the particular profits for the particular year - which, after all, was the real

object of the enquiry - has been a little submerged by this ideological dispute...... And it would be unfortunate if dogmas of method obscured the

real purpose - the finding of a fair, true and reasonable assessment of the real profit of the business for the year.

As the endeavour is, or should be to determine the true profits in a commercial sense, consistent with Income Tax laws, the department can

resort to the proviso to section 13 on the ground that the true profits cannot be deduced from the assessees system of accounting. The question,

therefore, boils down to this, namely, whether on the facts and circumstances of this case the proviso to section 13 is attracted or not. If there is no

scope for the proviso to apply because the true profits are properly reflected in the assessees accounts, then of course the department cannot insist

on a different kind of accounting which may lead to a computation of a larger income. On the other hand, if the department were to reach the

conclusion that the method of accounting though regularly employed by the assessee cannot lead to the deduction of the true profits necessarily the

proviso comes into play and the correct computation of the income has to be made by a different suitable method.

The order or the Tribunal is an intricate network of confusion. It certainly leans in favour of the assessee in holding that the production cost of

the positive can be written off completely after 150 shows. The Tribunal is not clear whether the positive is a capital asset or stock-in-trade. If 150

shows exhaust the positive the claim of the assessee for the allowance of Rs. 3,53,863 is well founded, as it cannot be the case of the department

that the positive did not or could not have completed 150 shows in a period of six months. What is really important to note is that there is no

finding of the Tribunal that the true profits of the assessee cannot be deducted from the method of accounting regularly employed by it. In the

absence of such a finding the proviso to section 13 cannot be invoked. In our opinion on finding that the positives were screened for exhibition

during the accounting year had been screened for six months prior to the end of the accounting year and the finding that after 150 shows the

positives have no value and their full value can be completely written off, the assessees claim for full allowance of the amount of Rs. 3,53,863

cannot be repelled. The question in T.C. No. 119 of 1962 and the question No. 1 in T.C. No. 90 of 1960 are therefore answered in favour of the

assessee and against the department.

What remains is question No. 2 in T.C. No. 90 of 1960. This relates to the disallowance of Rs. 4,000 paid by the assessee as remuneration to

its lawyers. We have already pointed out that till the board of directors of the assessee passed a resolution fixing a monthly salary in the time scale

of Rs. 500-50-750 for its legal advisers on March 30, 1956, the assessee was paying only an annual sum of Rs. 4,000. For the calendar year

1955 Rs. 4,000 was due to the legal advisers and this was paid on December 12, 1955. After the resolution of the directors dated March 30,

1956, amounts aggregating to Rs. 6,000 as per particulars given were paid. The department and the Tribunal have allowed Rs. 6,000 as proper

deduction in computing the income. But the Income Tax Officer, whose decision has now been affirmed by the Appellate Tribunal, disallowed the

sum of Rs. 4,000 paid on December 12, 1955. The reasoning of the Tribunal is that the sum of Rs. 4,000 cannot be allowed as it does not relate

to the accounting year. We are unable to agree with this view of the Tribunal. The sum of Rs. 4,000 paid in December, 1955, no doubt also relates

to the period January 1, 1955, to October 1, 1955, which falls outside the accounting year. But the liability of the company to pay its lawyers

accrued only within the accounting year and it is proper and legitimate that that liability should be discharged by payment, as was done. But it must,

however, be noted that the assessee paid its lawyers for the three months of October, November and December, 1955, an additional

remuneration of Rs. 500 per month. Therefore, for these three months the legal advisers got not only the sum of Rs. 1,000, namely, one fourth of

Rs. 4,000, but also Rs. 1,500 which in accordance with the resolution of the directors was to take effect from October 1, 1955. It cannot be said

that there was any accrual of liability to pay Rs. 1,000 to the legal advisers for the three months of October, November and December, 1955, in

consonance with the prior agreement to pay remuneration before the directors resolution. In our opinion, the accrued liability in December, 1955,

of the assessee to pay its legal advisers was only the sum of Rs. 3,000, that being the remuneration from January 1, 1955 to October, 1955, and

that the whole of Rs. 4,000 claimed by way of deduction in addition to the sum of Rs. 6,000 paid during the accounting year cannot be sustained.

The assessee should get the benefits of a further allowance of Rs. 3,000. Question No. 2 in T.C. No. 90 of 1960 is therefore answered in this way

: the assessee will be entitled to claim as deduction the sum of Rs. 3,000 and not Rs. 4,000 as remuneration paid to the assessment for the year

1957-58. The assessee will get its costs in T. C. No. 119 of 1962 from the department. Counsels fee Rs. 250. There will be no order as to costs

in T.C. No. 90 of 1960.