JUDGMENT Dr. [ENTITY], J.
1. By this reference under [SECTION] of the [ACT], made at the instance of the assessee, the Income-tax Appellate Tribunal ("the Tribunal") has referred the following question to us for opinion :
"Whether the assessee was entitled to relief allowed by the circular of the Central Board of Direct Taxes of October 4, 1969, in respect of its assessment for the assessment year 1972-73 made on March 31, 1975, when, by another circular dated December 5, 1974, the Central Board of Direct Taxes had modified the instructions contained in its earlier circular of October 4, 1969 ?"
2. Though the question is couched in very wide terms, we propose to confine our decision to the controversy raised in the said question in the light of the facts of the present case, which are briefly set out below :
The assessee is a partnership firm carrying on the business of distribution of films. In is assessment for the assessment year 1972-73, it claimed deduction for the whole of the amount paid by it for acquiring the distribution rights of certain films. Particulars of the films in which such rights were acquired on minimum guarantee basis are as follows :
(i) [ENTITY] 12,00,000 (ii) [ENTITY] 4,00,000 (iii) Dastak 2,60,000.
3. assessee also acquired the distribution rights of the film "Hathi Mere Sathi" on lease basis on payment of Rs. 4,37,589.
4. These films were released on different dates in the accounting year ended on March 31, 1972, relevant to the assessment year 1972-73. At the time at which the Income-tax Officer made the assessment, the particulars of collection from the date of the release to the end of the accounting year, i.e., March 31, 1972, as also the amount of total collections subsequent to the release of each picture were available. In its accounts for the assessment year 1972-73, the assessee had written off the full cost of acquisition of the distribution rights of the films referred to above. The Income-tax Officer, however, did not allow the deduction for the whole of the cost of acquisition for each of the said pictures as claimed by the assessee. He amortised a part of the cost of acquisition having regard to the available particulars of the collections up to the end of the financial year and the collections up to date.
5. The portion of cost to be amortised was worked out by the Income-tax Officer on the basis of the proportion of the collections from the respective films during the relevant accounting year to the total figure of collection from the films subsequent to its release. While making the apportionment in the manner set out above, it was clarified by the Income-tax Officer that the working was provisional and subject to revision in the light of further information regarding collections in future. The assessee went in appeal to the Commissioner of Income-tax (Appeals), who accepted the contention of the assessee and held that the entire cost of each film was allowable as deduction. The Revenue appealed to the Tribunal. The Tribunal decided the issue in favour of the Revenue and against the assessee. While doing so, the Tribunal held that the concession given by the circular of the Central Board of Direct taxes dated October 4, 1969 (see [PRECEDENT], was not available to the assessee even for the assessment year 1972-73 as the assessment for the same was made by the Income-tax Officer on March 31, 1975, when the Board had modified the said circular by another circular dated December 5, 1974 (see [PRECEDENT]). The Tribunal came to the above decision following the order of the Special Bench of the Tribunal in another case. Hence, this reference at the instance of the assessee seeking our the question, whether, on the facts and in the circumstances of the case, the Tribunal was justified in its above conclusion.
We have considered the circulars referred to above. These circulars deal with amortisation of cost of production and cost of acquiring distribution rights of feature films. There was a circular on the subject, issued by the Board as far back as on April 9, 1959. By a circular dated October 4, 1969, being Circular No. 30 (see [PRECEDENT], the Central Board of Direct Taxes modified the above circular to the extent indicated therein. This circular read as follows (see [PRECEDENT] :
"Films - Cost of production and cost of acquiring distribution rights - Amortisation of :
Attention is invited to the Board's Circular No. 4(XI-3) D of 1959, dated April 9, 1959, on the above subject.
2. The film producers have represented to the Board that a cinema film no longer has an effective life of about three years as was presumed by the Income-tax Department when devising the formula for the amortisation of the cost of the films spelt out in the circular mentioned above.
3. The matter has been carefully considered by the Board. In view of the changed situation regarding the minimum guarantee system operating in the film industry at present, it is perhaps inappropriate to resort to the inflexible rule in every case of amortisation of the cost of the film over a period of three years. The Board also agrees that the effective and earning life of the large majority of the present day cinema films seldom exceeds one year.
4. It has accordingly been decided that if the producer of a film does not wish to writ off the cost of the film in his books in the manner indicted in the Board's circular mentioned above, then he may be permitted to writ off the entire cost in the year in which the picture is released. 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 off in the books.
5. The Board's Circular No. 4(XI-3) D of 1959, dated April 9, 1959, is modified to the extent indicted above."
It is clear from a reading of the above circular that the Central Board of Direct Taxes ("the Board") being satisfied that it was inappropriate to resort to the inflexible rule in every case of amortisation of the cost of the film over period of three years which had been done in the past, decided "to permit the producers of a film to writ off the entire cost of production and cost of acquiring distribution rights in the year in which the picture was released". It was made abundantly clear that if the producer did so, the entire cost of the film would be allowed as an admissible deduction in the year in which the picture was released and the cost of the film was written off in the books.
7. There is no controversy in the present case that the pictures in question were released in the accounting year relevant to the assessment year 1972-73 and the entire cost of each of these films was written off in the books in the same year. The assessee claimed deduction of the entire cost of the film from its income of the said accounting year on the basis of the above circular dated October 4, 1969 (see [PRECEDENT], which permitted it to do so. There is also no dispute about the fact that the assessee is entitled to do so and get deduction for the entire cost in the relevant accounting year if the above circular of the Board has to be given effect to. The only controversy is in regard to the effect of the modification of the circular dated October 4, 1969 (see [PRECEDENT], by a circular dated September 18, 1972 (see [PRECEDENT]), and modification of the same by another circular dated December 5, 1974 (see [PRECEDENT]). In circular dated September 18, 1972 (see [PRECEDENT]), it was stated that the Board had reconsidered the question relating to the amortisation of the cost of production of a feature film and categorised the feature films in three classes for the purpose of amortisation of the cost of production or acquisition of distribution rights. It was further stated in the above circular that considering the actual case study of the feature films, the Board had decided to revise the amortisation formula of such films in the manner set out therein. According to the revised formula, in 'A' class films, the value of the film was to be depreciated by 60 per cent. in the first year, 25 per cent. in the second year and 15 per cent. in the third year on time basis as elucidated in its first circular dated April 9, 1959. A similar decision was communicated in regard to feature films in 'B' and 'C' class categories where it had decided that the entire cost of production may be allowed in the very first year of the production if the film was released in the first half of the accounting year. In case the film was realesed in the latter half of the accounting year, the value of the film had to be taken at 50 per cent. of the cost of production at the end of that accounting year and the balance 50 per cent. was to be adjusted in the second year. The same formula was made applicable for amortisation of cost of acquiring distribution rights in the hands of the distributor. This circular was again modified by [CASE NUMBER] (see [PRECEDENT]), dated December 5, 1974, by which the following guidelines were issued on the subject :
"1. Assessment of film producers and distributors - Amortisation of cost of production of films and acquiring of distribution rights - Instructions regarding -
Attention is invited to [CASE NUMBER], dated September 18, 1972, modifying its earlier circulars issued on the above subject.
2. The Board has re-examined the question relating to the amortisation of the cost of production of feature films in the assessments of film producers and distributors. A study of the results of the business earnings of the feature films has revealed that it is not always possible to know the final receipts of any particular film in the first year. Therefore, it would be appropriate to make the assessments on a provisional basis in the first instance by allowing proportionate deduction in respect of cost of production and cost of acquiring distribution rights on an estimated basis. On determination of the final results on the expiry of the exploitation period; the income/loss can be adjusted under [SECTION] of the [ACT], by revising the figure of allowance in respect of cost of production and acquisition of distribution rights in the proportion of the earnings spread over the period of exploitation
5. In the case of distributors, the entire cost of acquiring the distribution rights may be allowed on the basis of collections during the period of exploitation of the film. As the period of exploitation is likely to exceed one year, the assessment for the first year may be framed provisionally by allowing a part of the cost of distribution rights on an estimated basis against the actual receipts in the year under consideration. The final adjustment in the case of the producer will be made after the exploitation period under [SECTION] of the [ACT]. However, it a distributor produces evidence to the satisfaction of the Income-tax Officer that a particular picture has failed at the box office in the year of release itself and there is no possibility of further collection in the following years, the entire cost of acquisition of distribution rights may be allowed in the first year itself.
6. All pending assessments may be regulated in accordance with the guidelines spelt out in this circular. In cases where the assessments were completed in accordance with the instructions contained in [CASE NUMBER], and the appeals are pending either before the Appellate Assistant Commissioner or the Appellate Tribunal, the Department may agree to such assessments being set aside to be reframed on the basis of the guidelines laid down in this circular and the concerned assessees have agreed to the adoption of such a course of action." ([CASE NUMBER], dated December 5, 1974).
8. The uncontroverted factual position in the present case is that it was on the basis of the above permission of the Board contained in its circular dated October 4, 1969 (see [PRECEDENT], which was in operation during the entire accounting year corresponding to the assessment year 1972-73 and on the first day of the said assessment year, that the entire cost of acquiring the distribution rights in the accounting year corresponding to the assessment year 1972-73 in which the pictures were released had been written off by the assessee in its books for that year and deduction was claimed for the entire cost of such films in the said year.
9. There is no dispute about the fact that during the accounting year relevant to the assessment year 1972-73 to which this reference pertains, the only circular of the Board on the subject was Circular No. 30 (see [PRECEDENT], dated October 4, 1969, which permitted the assessee to write off the entire cost in the year in which the picture was released and declared in clear terms that "on the assessee's doing so, the entire cost of the film will be allowed as an admissible deduction in the year in which the picture was released and the cost was written off". There is also no controversy that if the circular of the Board dated October 4, 1969 (see [PRECEDENT], which was operative during the relevant previous year and even in a part of the assessment year, is held to be applicable to the assessment for the relevant assessment year, the assess is entitled to the deduction as claimed by it. The only contention of the Revenue is that the above circular having been modified twice during the pendency of the assessment and the circular on the subject available at the time of assessment to the income-tax Officer being circular dated December 5, 1974 (see [PRECEDENT]), the Income-tax Officer was entitled to compute the income in the manner set out in the said circular. Our attention was drawn to paragraph 6 of the said circular where it is stated that all pending assessments may be regulated in accordance with the guidelines spelt out therein.
10. We have given our careful consideration to the rival contentions. We have perused the circular of the Board dated October 4, 1969 (see [PRECEDENT], as also the subsequent circular dated December 5, 1974 (see [PRECEDENT]), to understand the true nature and content thereof. We are of the clear opinion that circular dated October 4, 1969 (see [PRECEDENT], confers a valuable right on the assessees engaged in the business of production or distribution of films in the matter of competition of their income from such business for the purpose of assessment and levy of income-tax. It does not deal with the procedural or administrative aspect as such. Withdrawal of this circular, undoubtedly, affects prejudicially the right of the assessee to get deduction of the entire cost of the film in the year in which the film was released. The real controversy, in our opinion, therefore, is whether the Board, by its circular dated October 4, 1969 (see [PRECEDENT], having permitted the assessees engaged in the production and acquiring of distribution rights of films to writ off the entire cost in the year in which it was released and having informed all concerned including the assessees that on doing so, the entire cost of the film would be allowed as an admissible deduction in the year in which the film was released, such deduction can be denied on the basis of modification made in the above circular after the expiry of the relevant accounting year and the first day of the assessment year. The law is well-settled that circulars of this type issued by the Board are binding so far as the officers of the Department are concerned. [SECTION] of the Act, which confers such powers on the Board specifically says so.
11. In the present case, it is clearly stated in the circular dated October 4, 1969 (see [PRECEDENT], that it was issued by the Board after reconsidering its earlier circular dated April 9, 1959, on the representation of the film producers. The Board agreed with the film producers that the life of the majority of the "present day cinema films" seldom exceeded one year and in the light thereof, decided that if the producer of a film did not wish to writ off the cost of the film in his books in the manner indicated in the Board's circular, dated April 9, 1959, then he might be permitted to writ off the entire cost in the year in which the picture was released. Thus, the producer of the film was given an option either to write off the cost of the film in the books in the manner set out in the Board's circular dated April 9, 1959, or to writ off the entire cost in the year in which the picture was released. It was decided by the Board that in the event of the producer of the film writing off the entire cost of the film in terms of the above permission or option given to him by the Board by its above circular, the entire cost of the film would be allowed as an admissible deduction in the very year in which the picture was released and the cost of the film was written off in the books. Evidently, it was a concession given by the Board to the producers of the films in the matter of amortisation of the cost of production and cost of acquiring distribution rights. They were free to choose one of the two methods of amortisation, one set out in circular dated April 9, 1959, and other in terms of the option given by the Board by the circular dated October 4, 1969 (see [PRECEDENT]. In such a situation, if an assessee acts in pursuance of the above circular and the permission of the Board contained therein and writes off the entire cost and claims deduction in the very year in which the picture was released, the deduction cannot be refused on the basis that during the pendency of the assessment, the permission so given by it has been modified and/or withdrawn.
12. This legal position was accepted by the Supreme Court in [PRECEDENT]. In that case, the Supreme Court was required to decide the applicability of a circular issued by the Board on May 10, 1955. The Supreme Court observed (at page 203) :
"It is clear that a circular of the kind which was issued by the Board would be binding on all officers and persons employed in the execution of the Act under [SECTION] of the Act [1922 Act]. This circular pointed out to all the officers that it was likely that some of the companies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea was not to affect such transactions and not to bring them within the mischief of the new provision. The officers were, therefore, asked to intimate to all the companies that if the loans were repaid before June 30, 1955, in a genuine manner, they would not be taken into account in determining the tax liability of the shareholders to whom they may have been advanced. In other words, past transactions which would normally have attached the stringent provisions of [SECTION] as it was introduced in 1955, were substantially granted exemption from the operation of the said provisions by making it clear to all the companies and their shareholders that if the past loans were genuinely refunded to the companies, they would not be taken into account under [SECTION]. [SECTION] would, therefore, normally apply to loans granted by the companies to their respective shareholders with full notice of the provisions prescribed by it."
13. Evidently, the circular in the case clearly deviated from the provisions of the Act, yet in view of the nature and content thereof, the Supreme Court held that it was binding on the Income-tax Officer. This was accepted by the Supreme Court itself in [PRECEDENT], when it said (at page 921) :
"The directions given in that circular clearly deviated from the provisions of the Act, yet this court held that the circular was binding on the Income-tax Officer."
14. The object and scope of the circulars and the binding nature thereof also came up for consideration before a Full bench of the Kerala High Court in [PRECEDENT]. The court observed (at page 338) :
"The section sufficiently brings out the object and the scope of the circulars. Sub-section (2) requires that in certain cases, the circulars are to be published and circulated in the prescribed manner for general information. We have little doubt that although the circulars are primarily meant to serve as guidelines and are binding upon the subordinate authorities vested with the administration of the [ACT], some of them, from their nature and content, do confer some privileges and rights on the assessee whose cases have to be assessed by the authorities concerned. There may be circulars which affect only certain administrative or procedural aspects; there may equally be circulars which affect certain important rights in regard to assessment of the assessees. This has been noticed and is sufficiently implicit in the provisions of [SECTION] of the Act. In regard to the latter type of circulars affecting the rights of assessees, we are of the opinion that despite the power to recall or withdraw the circulars, the assessee's right to have the assessments effected or carried out in accordance with the circulars, cannot be prejudicially affected by the recall or the withdrawal of the circulars."
15. Having regard to the scope, effect and purport of the circular involved in that case, 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, it was held that the assessee was entitled to have the assessment made and completed in accordance with the circular, which had issued the necessary directions as to how the assessment had to be made.
16. Following the above decision, in [PRECEDENT], it was held by the Kerala High Court that the circular issued by the Board regarding amortisation of cost of distribution rights of cinema films as it stood at the beginning of the assessment year entitling an assessee to 100 per cent. amortisation would be applicable, and the subsequent modification of the circular would be of no relevance. It may be pertinent to observe that the special leave petition filed by the Revenue against the above judgment was also rejected by the Supreme Court.
17. It may also be expedient at this stage to refer to the decision of the Supreme Court in [PRECEDENT] where it was held (at page 264) :
"Now, it is well-settled that the [ACT], as it stands amended on the first day of April of any financial year must apply to the assessments of that year. Any amendments in the Act which come into force after the first day of April of a financial year, would not apply to the assessment for that year, even if the assessment is actually made after the amendments come into force."
18. In our opinion, this principle would also govern the applicability of the beneficent circulars of the Board which confer some privileges or rights on the assessees.
19. The legal propositions that emerge from the above discussion can be summed up thus :
1. Certain circulars of the Board confer some privileges and rights on the assessees in regard to assessment.
2. Such circulars as they stand on the first day of April of the assessment year must apply to the assessment of that year.
3. Modification or withdrawal of such circulars during the pendency of the assessment proceedings, cannot prejudicially affect the right of the assessee to have his assessment made in accordance with the circular as it stood prior to its amendment or withdrawal.
20. These propositions, of course, would not be applicable to circulars which affect only administrative or procedural aspects.
21. Considering the facts of the present case in the light of the above proposition, it is clear that circular dated October 4, 1969 (see [PRECEDENT], would be applicable to the assessment of the assessee for the assessment year 1972-73. This circular evidently is a beneficent circular. It gives an option to the assessee to writ off the cost of the film in its books either in the manner indicted in circular dated April 9, 1959, or to writ off the entire cost in the year in which the picture is released. It says in clear and unambiguous language that on his doing so, the entire cost of the film would be allowed as an admissible deduction in the year in which the picture is released and the cost of the film is written off. This circular thus confers a valuable right on the assessee in the matter of computation of his income for the purpose of assessment and levy of income-tax. The assessee, on fulfilment of the condition set out therein, is entitled to claim deduction of the entire cost of the film in the year of release and the Income-tax Officer is bound to allow the same in view of the circular of the Board. Modifications of the above circular during the pendency of the assessment are not relevant for the pending assessments. Such assessments are to the completed by following the unamended circular.
22. In the premises, we are of the clear opinion that in the present case, the Income-tax Officer was not justified in refusing to allow amortisation of the entire cost of acquisition or distribution rights in the films in the year of release as claimed by the assessee on the basis of the circular of the Board dated October 4, 1969 (see [PRECEDENT], which was operative during the accounting year corresponding to the relevant assessment year and even thereafter on the basis of revised guidelines issued by the Board during the pendency of the assessment proceedings. The Tribunal was, therefore, not correct in upholding the same.
23. We, accordingly, answer the question referred to us in the affirmative and in favour of the assessee.
24. Under the facts and circumstances of the case, there shall be no order as to costs.