1. This is a departmental appeal against the order of the Commissioner (Appeals) deleting an addition of Rs. 1,31,750 made by the ITO in the course of working out the amortization value of the films.
2- The assessee is a registered firm. They are distributors of feature films. During the accounting year concerned, the assessee-firm had acquired distribution rights of six pictures. In the method of accounting followed by the assessee, no loss or profit is brought to the profit and loss account till the collections made cover the cost of acquisition. In one of the pictures 'Vardan', the cost of acquisition was Rs. 2.85 lakhs. The realization up to the end of the accounting year was Rs. 2,38,377. There was a deficit of Rs. 46,622. This was not brought to the profits and loss account but was carried forward to the next year. As it happened during the accounting year, the six pictures acquired by the assessee cost them more than the collections made up to the end of the year. In accordance with the method of accounting followed, all the deficits were carried forward to the next year. In the accounts for the following year, the excess realised was credited to the profit and logs account. Similarly, the deficit still persisting was charged to the profit and loss account. The profit of the year shown in the assessee's accounts reflected the excess collections over the cost of acquisition of films purchased in the prior accounting ' years. This method had been followed by the assessee consistently in the earlier years. The Tribunal, while disposing of the appeal of the assessee-firm for the year 1973-74 had noticed the method of accounting and had held that this method correctly reflected the profit and loss from year to year and so the department could not leave the past practice and adopt a new course.
3. For the assessment year 1976-77, the assessee filed a return showing an income Rs. 1,08,922. The ITO noticed that the method of accounting followed by the assessee did not admit any profit in respect of the six films acquired by them. He was of opinion that this method could not be accepted. He recast the accounts by allowing amortization on the basis of the collections made. This was in accordance with the circular issued by the CBDT dated 3-12-1974. We may mention here that the asses-see had not opted for applying the provisions of rule 9B of the Income-tax Rules. The method of amortization adopted by the ITO made an addition of Rs. 1,31,750 (sic).
4. On appeal, the Commissioner (Appeals) set aside this addition. He found that the assessee's method of accounting has been approved by the Tribunal in the prior years. Even if there is any adjustment required, it gets levelled off in the subsequent years.
5. Against this finding, the department is in appeal before us. Shri Joy, the departmental representative, submitted that the amortisation to be allowed to the films had to be according to the circular issued which was in existence during the accounting year. The accounting year being the calendar year 1975, the circular of 5-12-1974 was applicable.
The ITO had allowed amortisation strictly according to the circular and, therefore, his order should be restored. He also submitted that the application of the circular has been approved in a similar case by the Special Bench of the Tribunal in the case of Rajshfee Productions (P.) Ltd., vide its decision in IT Reference No. 441 (Bom.) of 1976-77 dated 9-12-1977.
6. Shri Trivedi, the learned counsel for the assessee, on the other hand, submitted that the point at issue is fully covered by a decision of the Tribunal in an earlier year. The facts are identical with that year and so the decision should be made applicable. He further submitted that the Special Bench decision is not relevant to the issue.
The Special Bench had decided the question as to which of the two circulars is to be applied. There is no such issue in the case now before us.
7. It is true that the assessee's method of accounting has been approved by the decision of the Tribunal in the assessee's own case. If that decision is to be applied, no addition could be made ; but that decision was rendered in 1977. It requires to be examined whether that decision is still consistent with the authorities which had decided similar issues subsequently.
8. In our opinion, a decision on this point rests on the finding of the nature of the distribution rights in the hands of the assessee. Is it capital asset or is it a stock-in-trade of the assessee Depending upon the nature of the asset, we have to further examine whether the method of accounting followed, i.e., not to debit the profit and loss account with either the collection or with the deficit in the first year of acquisition of the rights, is correct or not.
9. The ground of appeal of the department asserts that the right of distribution is the stock-in-trade of the assessee and that is why a reference to the valuation of the closing stock is made in the ground of appeal. Our considered opinion is that the right cannot be in the nature of stock-in-trade. The first case is the decision of the Bombay High Court in the case of CIT v. Patel International Film Ltd. [1976] 102 1TR 219. In that case, the assessee had purchased a film for Rs. 60,000. The film did not succeed in the box office and the assessee had claimed heavy amortisation charge. The ITO rejected the assessee's claim on the ground that the acquisition of the film was not a commercial transaction at all. The Tribunal made an observation that the film was not the stock-in-trade of the asscssee. At page 224 there are observations of the High Court which would show that a film of this nature in the hands of the producer would be a capital asset. The decision of the Gujarat High Court in the case of H. Mohmed & Co. v.CIT [1977] 107 ITR 637 is more directly to the point. The Gujarat High Court had considered the two decisions of the Madras High Court in the cases of Gemini Pictures Circuit Ltd. v. CIT [1958] 33 ITR 547 and CIT v. Modem Theatres Ltd. [1963] 50 ITR 548. Both the Madras High Court rulings give the impression that, according to that authority, films are stock-in-trade. But the Gujarat High Court has pointed out that in both cases the Madras High Court has not laid down any principle which holds that films have to be considered as stock-in-trade. They were mere considering about the directives of the CBDT. The Gujarat High Court, thereafter, considered the test to be applied in order to find out whether an asset is stock-in-trade. At page 643, the High Court pointed out that a stock-in-trade is something which a trader or a businessman deals, whereas his capital asset is something with which he deals. One of the indications for deciding is whether a particular assessee is buying or selling the goods or whether he is merely investing his money with a view to earn further income or with a view to carry on his other business. The High Court then considered cases of hiring cars. They had pointed out that hiring a car is a thriving business where the car is a capital asset A similar case is of a person carrying on business of circulating library. There also, the books are hired out on a fee or charge. In both cases, they are the capital assets.
10. The same principle should apply in the assessee's case before us.
The assessee has acquired rights of distribution of the films. He has been given several prints of the same. These prints are hired out to the various exhibitors and sub-distributors. The assessee's business is to get a percentage of the collections from the exhibition of these prints. This is akin to the hire charge in the case of the car or library books.
11. On the finding that the assessee had acquired a capital asset, the question next is how this asset would be exhibited in the accounts. In this connection, we must note that the capital asset of the assessee has a short life. A picture outlives its value within a couple of years. The method of accounting to be followed should be such that it is realistic and in accordance with such short life. It is possible in accountancy principles to treat such cost of assets as deferred revenue expenditure. The cost can be written off in the books in two or three years. The other method which is followed by the assessee, is to write off the profit or loss in the second year. Both these methods are acceptable and faithfully reflect the profits, from the exploitation of the films. As the Tribunal had observed while disposing of the earlier years' appeals, the method of accounting followed is acceptable.
12. There is still the question as to how the provisions of the Income-tax Act, 1961 ('the Act'), would admit such a method of accounting. On the finding that the asset is of capital nature, the deduction available to the assessee is only depreciation. No depreciation has been allowed under the Income-tax Rules for films.
Therefore, the department's case is that the amortisation as given by the circular alone is applicable. This view of the department would be acceptable if depreciation is the only allowance available to the assessee in respect of a capital asset. Apart from this allowance of depreciation, it is also open for an assessee to have the balancing charges allowed to him under Section 32(1)(iii) of the Act. Whereas to be allowed depreciation under Section 32(1), the assessee has to bring his case within the Income-tax Rules and the schedules, in respect of the terminal allowance under Section 32(1)(iii), it is not necessary.
This section allows the assessee a deduction of the difference in value between the cost or the written down value and the scrap value. The only condition is that the asset should be a building, machinery, plant or furniture and, further, it should be sold, discarded, demolished or destroyed. As far as the first condition is concerned, in view of the various decisions starting from CIT v. Elecon Engg. Co. Ltd. [1974] 96 1TR 672, it is easy to hold that the distribution rights consisting of various prints of the films are plant. The second condition is also satisfied if we keep in view that the life of the asset is only about two years at the most. At the end of the 2 year period, as far as the assessee is concerned, it had written it off as of no [further value.
This would amount to discarding within the meaning of Section 32(1)(iii). So, the assessee will be entitled to claim the deduction in the second year.
13. For these reasons, we will uphold the order of the Commissioner (Appeals) and dismiss the departmental appeal.