2003-VIL-185-ITAT-DEL

Equivalent Citation: ITD 089, 301, TTJ 082, 987, [2004] 89 ITD 301 (DELHI)

Income Tax Appellate Tribunal DELHI

IT APPEAL NO. 311 (DELHI) OF 1999

Date: 15.12.2003

INCOME-TAX OFFICER.

Vs

HONEY ENTERPRISES.

BENCH

Member(s)  : K. C. SINGHAL., KESHAV PRASAD.

JUDGMENT

Per Singhal, J.M. - Various grounds have been raised by the revenue in this appeal. However, the main issue arises from Ground Nos.1 & 2 which read as under:

"1. In the facts and under the circumstances of the case, the ld. CIT(A) has erred in holding that action under section 147/148 by the Assessing Officer was unjustified.

2. In the facts and under the circumstances of the case, the ld. CIT(A) has erred in deleting additions of Rs. 15,66,161 made on account of un-amortized cost of pictures brought forward from earlier years under Rule 9B and in allowing carry forward of Rs. 16,57,100 under Rule 98."

2. The brief facts giving rise to the aforesaid issue are these: The assessee was engaged in the business of distribution of feature films. The return for assessment year 1993-94 was filed by the assessee on16-12-1993declaring income of Rs.755 which was accompanied by statement of accounts along with the audit report. The said return was processed under section 143(1) on30th March, 1994. Subsequently, on the basis of findings arrived at in the assessment proceedings for assessment year 1992-93, the Assessing Officer initiated the proceedings under section 147 after recording the reasons vide order sheet entry dated-23-6-1995. The relevant portion of the reasons as extracted by the CIT(A) in his order reads as under:

"That it was observed by him that the assessee had interpreted the provision of Rule 9B in a wrong way. The method adopted by the assessee and calculation as per Rule 9 have been dealt with in details in the assessment year 1992-93. It has been observed that in assessment year 1993-94 also the assessee has twisted the provision of Rule 9B as per his own wishes. Looking to the above facts I have to believe that income in the assessment year 1993-94 has escaped assessment and it needs to be re-assessed, re-computed by issue of notice under section 148."

In the course of reassessment proceedings, the assessee was asked to explain as to why it had claimed as deduction the cost of positive prints in the year under consideration which were actually incurred in assessment year 1992-93. The explanation of the assessee was that it was carried forward in assessment year 1992-93 in accordance with Rule 9B of Income-tax Rules, 1962. The Assessing Officer did not accept such contention as in his view Rule 9B specifically prohibits amortization and carried forward of the expenses regarding positive prints. According to the Assessing Officer, the cost of positive prints was allowable as deduction in the year in which it was actually incurred and, therefore, the same could not be carried forward to the next year. So in his view, there was escapement of income for assessment year 1993-94 to the extent excessive claim stood allowed under section 143(1) inasmuch as the cost of positive prints incurred in assessment year 1992-93 stood wrongly allowed in the year under consideration.

3. To appreciate the real controversy, it would be appropriate to understand the relevant figures and facts as well as the relevant aspect of Rule 9B. Rule 9B provides that in case of film distributor, the cost of acquisition of film shall be allowed as deduction in the year in which the rights of exhibition of the films is acquired by such distributor. However, it further provides where the film distributor exhibits the films himself and the film is not released for exhibition on commercial basis at least 180 days before the end of such previous year then the cost of acquisition, to the extent it is not realized, shall be carried forward to the next year and shall not be allowed as deduction in the year of acquisition. The cost of acquisition has been defined in the Explanation to sub rule (1) of rule 9B. According to this Explanation, the cost of acquisition to a distributor would be the amount paid by the distributor to the film producer or to another distributor and where exhibition rights are acquired on Minimum Guaranteed (MG) amount basis then such MG amount, but it would not include the cost of positive prints and the expenditure incurred in connection with the advertisement of such film.

4. The modus operandi of the assessee was to debit the trading account of each film with the MG amount as well as the cost of prints and credit the same by the amount collected by him on exhibition of such film. If the realization was less than the total cost debited to trading account was carried forward to the next year by showing such amount in balance sheet on the asset side.

5. In assessment year 1992-93, the assessee exhibited certain films which, inter alia, included two films, namely, 'Lakshman Rekha' and 'Suryavanshi' where the assessee could not exhibit these films on commercial basis for 180 days or more and also could not realize the expenditure on account of MG amount and cost of print. In case of 'Lakshman Rekha', MG amount was Rs.35 lakhs and cost of prints was Rs. 9,44,477 while the amount realized by the assessee was Rs. 21,57,375. Thus, the loss to the assessee was Rs. 22,87,102 which was carried forward to assessment year 1993-94. In the similar manner, there was loss of Rs. 6,21,685 in the case of film 'Suryavanshi' and the same was also carried forward to assessment year 1993-94. Thus, two losses have been claimed as deduction in the year under consideration.

6. Similarly in the year under consideration, the assessee could not recover the cost of acquisition and cost of positive prints in the case of two films, namely, 'Insaniyat Ke Devta' and 'Shriman Aashique' and consequently, the losses of Rs. 9,25,687 and Rs. 7,31,413 respectively were carried forward to assessment year 1994-95.

7. In the reassessment proceedings, the assessee was asked to explain as to why the cost of prints incurred in assessment year 1992-93 should not be disallowed, being contrary to the provisions of Rule 9B. However, the explanation of the assessee was that carry forward was as per Rule 9B. Not satisfied with the explanation of the assessee, the Assessing Officer held that assessee was entitled to carry forward only that much amount of MG amount which could not be recovered. Where the amount realized was more than the MG amount, the assessee was not entitled to carry forward any amount. Accordingly, he allowed carry forward of Rs. 13,42,626 only (Rs. 35 lakhs minus Rs. 21,57,374) in the case of film 'Lakshman Rekha' but did not allow any carry forward in respect of the other film 'Suryavanshi' since the amount realized was Rs. 20,78,314 as against MG amount of Rs. 18 1akhs. Accordingly, the sum of Rs. 13,42,626 was allowed as deduction in the year under consideration as against the sum of Rs. 29,08,787. Thus, addition was made to the extent of Rs. 15,66,161.

8. In view of the above interpretation of Rule 9B, in all fairness, the Assessing Officer also reworked out the profits in respect of two films 'Insaniyat Ke Devta' and 'Shriman Aashique' which was run on commercial basis for less than 180 days. The assessee had claimed carry forward, of the sum of Rs. 9,25,687 and Rs. 7,31,415 in respect of these two films respectively to assessment year 1994-95. The Assessing Officer noted that the MG amount in respect of 'Insaniyat Ke Devta' was Rs. 31.5 lakhs while the amount realized was Rs. 43,32,284. Since the amount realized was more than the MG amount, the Assessing Officer refused to carry forward any amount to next year. Accordingly, it was also held that the sum of Rs. 11,82,284 (Rs. 43,32,284 minus Rs. 31,50,000) should be included in the taxable income. In respect of the other film 'Shriman Aashique', the amount realized by the assessee was Rs. 13,34,635 as against MG amount of Rs. 18 lakhs. Hence, he allowed the carry forward of Rs. 4,65,365. However, it was further held that assessee was entitled to deduction in respect of cost of prints of Rs. 21,07,972 for 'Insaniyat Ke Devta' and Rs. 2,66,049 for 'Shriman Aashique'. Thus, he included in the total income the sum of Rs. 11,82,284 on one hand and allowed deduction of Rs. 21,07,972 and Rs. 2,66,049 in respect of these two films. This resulted in extra deduction of Rs. 11,91,737 though not claimed by assessee. Thus, claim of carry forward of Rs. 16,57,102 was reduced to Rs. 4,65,365.

9. On appeal, it was contended before the CIT(A) that the order for assessment year 1991-92 was passed in March, 1994 accepting the assessee's books of account based on assessee's interpretation of Rule 9B. Hence, proceedings under section 147 were initiated only on mere change of opinion which was not permissible in law. The CIT(A) accepted this contention of the assessee and, therefore, held that the action of Assessing Officer under section 147 was unjustified. As far as addition of Rs. 15,67,161 was concerned, the same was deleted following his order for assessment year 1992-93. Consequently, the carry forward of Rs. 16,57,100 was also allowed to next year. Aggrieved by the same, the revenue is in appeal before the Tribunal on these issues.

10. The learned DR has vehemently contended before us that reassessment proceedings were validly initiated inasmuch as there was escapement of income since cost of positive prints could not be legally carried forward to the next year as per Rule 9B. According to her, what was allowed as carried forward was the cost of acquisition which did not include the cost of positive prints as per the provisions of Explanation to sub-rule (1) of rule 9B. Since the assessee had claimed the carried forward with reference to the MG amount as well as the cost of prints, it amounted to allowance of cost of print as deduction in the next year even though under the law the cost of print incurred by the assessee is allowable only in the year in which such cost is incurred. It was further submitted by her that Assessing Officer had never accepted the claim of the assessee and, therefore, the question of change of opinion did not arise. Further, the return of the assessee for the year under consideration was merely processed under section 143(1) and, therefore, it could not be said that any view was formed by the Assessing Officer in respect of the year under consideration. On the other hand, the learned counsel for the assessee has supported the order of the CIT(A) by contending that the method of accounting followed by the assessee has been accepted by the Assessing Officer since such method of accounting was being followed consistently and, therefore, it was a mere change of opinion and consequently, the issue of notice under section 147 was bad in law.

11. After considering the rival contentions of the parties, we are unable to uphold the order of the CIT(A) on the issue arising from Ground No.1. There is no dispute to the legal position that reassessment proceedings cannot be initiated on mere change of opinion and rather it is the settled legal position. Whether there is a change of opinion or not would, in our opinion, depend on facts of each case. A change of opinion pre-supposes the existence of an opinion formed by the Assessing Officer in the earlier proceedings. The formation of opinion is a positive act on the part of the Assessing Officer. Thus, an opinion can be said to be formed where there is an application of mind with reference to the material on record and the relevant provisions of the statute. Therefore, if in earlier proceedings, no such opinion is formed and there is escapement of income then it cannot be contended that reassessment proceedings are initiated on mere change of opinion. Mere assessment in a routine manner, in our opinion, would not lead to the inference that an opinion was formed by the Assessing Officer in respect of all the issues involved in the assessment. The view taken by us is fortified by the various judgments.

12. At this juncture, it would be appropriate to refer to the observations of Justice D.R. Khanna of the Hon'ble Delhi High Court in the case of CIT v. H.P. Sharma [1980] 122 ITR 675 at page 699 which are quoted below:

"It need hardly be said that change of opinion presupposes that there was earlier formation of an opinion. When no such opinion was formed, it will be too far-fetched to assume that a change in that opinion was being effected. Further, the safest and surest guide for ascertaining whether any such opinion was formed at the original assessment stage is to look to the assessment order itself. When it, of its own, does not reveal that the matters and controversies now sought to be raised by way of reassessment were at all before the ITA or considered by him, it would be entirely surmiseful and, therefore, no permissible to still import that existence and consideration. This can however, be permissible only where the assessment record of that stage overwhelmingly brings out that the matter did come for due consideration and was in fact considered. Mere silence on the matter or absence of discussion in the original order does not imply that the ITA adjudicated upon the same one way or the other."

13. This aspect has also been considered by the Hon'ble Gujarat High Court in the case of Praful Chunni Lal Patel v. M.J. Makwang, Assistant Commissioner [1999] 236 ITR 832. Their Lordships at page 841 observed as under:

"Since the Assessing Officer at the first assessment in the year 1991-92 never really formed an opinion on the question whether there was a transfer on September 19, 1990 of the land in question to the firm and that the amounts credited to the accounts of the partners who had contributed the lands to the firm, were meant to be the price of the land which was to be actually paid from the collections received by the firm from membership fees as soon as received, as was envisaged admittedly in paragraph 11 of the partnership deed, there was no question of any change of opinion when on the relevant facts being found the Assessing Officer while protectively assessing the petitioner-assessee for the year 1993-94, noted that this was a case for issuance of a notice under section 148, which came to be issued thereafter. When the amount of taxable income and of the tax payable thereon were not ascertained at all by the Assessing Officer in respect of the transfer made by the assessee in favour of the firm on September 19, 1990, there obviously was no opinion formed in that regard and, consequently, there would not arise any question of a mere change of opinion. In cases where the Assessing Officer had overlooked something at the first assessment, there can, in our opinion, be no question of any change of opinion when the income which was chargeable to tax is actually taxed as it ought to have been under the law but was not, due to an error committed at the first assessment."

14. Similar view has also been taken by the Hon'ble Allahabad High Court in the case of Renu Sagar Power Co. Ltd. v. ITO[1979] 117 ITR 719 wherein it was observed, "The question of change of opinion would arise only when the same had already been expressed on the materials on record. If the materials were not before the ITO, the question of change of opinion does not arise", Similarly, observations were also made by the Hon'ble Calcutta High Court in the case of ITO v. Mahadeo Lal Tulsyan [1978] 111 ITR 25, which are quoted below:

"A change of opinion by the ITO contemplates formation of two different opinions or to make two different inferences at two stages on the same set of primary facts which are true."

15. Let us now examine the facts of the case in the light of the above legal position. In the present case, in our opinion, the assessee has not been able to establish that Assessing Officer had accepted the interpretation of Rule 9B in the manner stated by the assessee. As far as this year is concerned, the return filed by the assessee was processed under section 143(1). Therefore, it cannot be said that Assessing Officer formed any opinion in such proceedings. As far as earlier years are concerned, no material has been placed before us in respect of any year prior to assessment year 1991-92. As far as assessment year 1992-93 is concerned, the Assessing Officer has not accepted the stand of the assessee. So the only year on which reliance is placed by the assessee is the assessment year 1991-92. Let us examine whether the Assessing Officer had accepted the stand of the assessee in assessment year 1991-92. In that year, the assessee could not run four films, namely, 'Farishtey', 'Saugandh', 'Pathar Ke Phool' and 'Pathar Ke Insan" on commercial basis for 180 days or more. The rights to exhibit these films were acquired on MG amount basis. The assessee also incurred expenditure on acquiring positive prints. For example, MG amount of Rs, 55 lakhs was paid for acquiring rights in the film 'Farishtey'. The expenditure by way of cost of prints was Rs. 16,63,006 while the realization was only Rs. 43,99,031. According to the assessee, there was loss of Rs. 27,63,974 which was carried forward to next year by showing the same to the asset side of the balance sheet as on 31-3-1991 and no claim was made in that year. Similarly, method was adopted for the other three films. The perusal of the assessment order shows that the Assessing Officer simply observed:

"The losses as shown in the asset side will be considered on merit in the assessment year 1992-93 only if the assessee has not surrendered the rights till then."

These observations clearly show that Assessing Officer had never adjudicated the issue regarding interpretation of Rule 9B or the stand taken by the assessee. The words "on merits" in the above observations clearly indicate that he was not deciding the issue and such claim of the assessee was left open to be considered in the next year. In the next year, the interpretation of Rule 9B as stated by the assessee was rejected by the Assessing Officer vide order dated30th March, 1995. So, in our considered opinion, it cannot be said that the Assessing Officer ever accepted the stand of the assessee. Notice under section 147 was issued only after the assessment for assessment year 1991-92 which constituted the material for forming the belief that income for assessment year 1993-94 had escaped.

16. Coming to the merits, we are of the considered view that if any assessment is contrary to the clear provisions of law, it can be said that there is an escapement of income. As stated earlier, Rule 9B clearly and specifically provides that cost of prints cannot be included in the cost of acquisition of the exhibition rights in the film. Therefore, what can be carried forward is the cost of acquisition and not the cost of prints. On the contrary, the cost of prints can be allowed in the year in which the expenditure incurred as per the provisions of section 28 either on accrual basis or cash basis, as the case may be. It is nobody's case that cost of prints was incurred in the year under consideration in respect of two films 'Lakshman Rekha' and 'Suryavanshi'. Therefore, the assessee was entitled to set off only that part of carried forward which related to MG amount and not the cost of prints. Thus, by claiming excess amount of carry forward and acceptance of the same in the routine manner under section 143(1), the income of the assessee had been under assessed. Hence, notice under section 147 was validly issued. Accordingly, the order of CIT(A) is quashed on this issue and consequently, Ground No.1 raised by the revenue is allowed.

17. As far as Ground No.2 is concerned, both the parties are agreed that the issue stands covered against the assessee by the decision of the Tribunal dated18th December, 2001in assessee's own case for assessment year 1992-93. Therefore, following the same, the order of the CIT(A) on this issue is reversed and the order of Assessing Officer is restored. Thus, ground No.2 is allowed.

18 to 20. [These paras are not reproduced here, as they involve minor issues.]

 

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