1. This is a reference under section 66 (1) of the Indian Income-tax Act, 1992, in which at the instance of the Commissioner of Income-tax, Bombay City I, Bombay, the following question has been referred to us by the tribunal for our opinion :
'Whether the sum of Rs. 60,000, which is the purchase cost of the film 'Pomposh' paid by the assessee-company, could be allowed as an admissible revenue expenditure for the assessment year 1956-57 ?'
2. The facts leading to this question may briefly be stated : The question relates to the assessment year 1956-57, the previous year of which was the financial year ending 31st of March, 1956. The assessee is a private limited company carrying on business of processing and printing, films. In August, 1955, it purchased the processing and printing laboratory known as 'Film Center' from M/s. Patel India Ltd. Three months later, by an agreement dated 1st of Novermber, 1955, the assessee-company purchased the film 'Pomposh' from M/s. Patel India Ltd. for a sum of Rs. 60,000 the value of which was shown in the account books of the year at Rs. 72,000 by the vendor. It appears that the first gevacolour film 'Pomposh' was purchased in 1953 by M/s. Films of India, a proprietary concern of Mr. I. A. Patel. It was released for exhibition through M/s. Patel India Ltd. who had purchased it for a sum of Rs. 1,90,000. It appears that the assessee-company had distributed the above picture on the basis of 15% commission. It further appears that during the period between November, 1955, and March, 1956, the gross collections realised from the exhibition of the picture amounted to Rs. 1,169. In other words, the picture was a flop. For the assessment year 1956-57, the assessee-company claimed Rs. 15,000 as amortization cost. That claim was disallowed by the Income-tax Officer as he doubted the bona fides of the assessee-company in purchasing the film. The Income-tax Officer took the view that the assessee-company knew that the film was a flop and had no exploitation value and it was doubtful whether M/s. Patel India Ltd. could at all re-sell the picture to the assessee-company for Rs.60,000. He, therefore, was of the opinion that the assessee-company had acquired the film not for the purpose of exploitation, but only for the purpose of claiming amortization and, therefore, he disallowed the claim.
3. The assessee-company preferred an appeal to the Appellate Assistant Commissioner and it was contended on its behalf that it had purchased this picture 'Pomposh', which was the first gevacolour picture ever produced in India and processed in the Film Center laboratory, which the assessee-company had purchased, so as to enable it to exhibit the same for inducing confidence in the other producers. It was pointed out that even the very production of this picture by M/s. Patel India Ltd. did not have distribution or exhibition as its primary purpose, but a secondary one, while the primary purpose was to show that such pictures could be produced and processed in the Film Center Laboratory so that more and more producers could be forthcoming to indent on the services of the laboratory for their gevacolour processing. The Appellate Assistant Commissioner rejected these contentions of the assessee-company and opined that the acquisition of the picture 'Pomposh' was not commercial transaction at all. He observed that admittedly the picture was not acquired so much for its distribution or exhibition value, as those expressions were normally understood, but the acquisition was valuable from the point of view of the assessee-company's business as the owner of the Film Center, a colour processing laboratory. In other words, according to the Appellate Assistant Commissioner, the picture was no more a stock-in-trade of the assessee-company. Thus, he took the view that the picture was valueless in the sense of distribution or exploitation thereof, but it had been acquired as a capital asset by means of which the assessee-company could induce confidence in its customers intending to produce colour films. He, therefore, held that since films were not depreciable assets and there being no provision for allowing depreciation on them under rule 8, no claim for depreciation could be allowed to the assessee-company and further the amortization also could not be allowed because the picture was not a stock-in-trade. When the matter was carried to the Tribunal in second appeal, the Tribunal accepted the department's contention that the assessee-company did not carry on business of film exhibition, that it did not purchase the film 'Pomposh' for business purpose and that the film was not its stock-in-trade. In this view of the matter the Tribunal upheld the disallowance of the claim for amortization.
4. However, an alternative claim was put forward on behalf of the assessee-company before the Tribunal. It was contended that the film was purchased to serve as a model colour film and for the purpose of showing to its customers the way in which colour processing was done and that the picture, though not exhibited by the assessee-company as a film exhibitor, was exhibited to its customers who had come to it for colour processing and as such the expenses incurred for acquiring the said film should be allowed as business expenditure. This alternative claim was opposed on behalf of the revenue by contending that if the assessee-company really wanted to exhibit a colour film for the purpose of attracting more customers intending to do colour processing, it would have shown one of its own colour films, that is to say, a colour film produced by it and not other's work as a piece of its own advertisement. It was further contended that if it was actually meant for advertisement purpose, the assessee-company could have purchased a smaller footage and not the entire film at the cost of Rs. 60,000. On these grounds the claim of the assessee-company had purchased the laboratory from M/s. Patel India Ltd. and the film 'Pomposh' was the first gevacolour film processed by M/s. Patel India Ltd. and, therefore, it would stand to reason that the assessee-company had purchased that film to prove to its customers that by the use of the same machinery and laboratory the colour films of that type and mark could be produced. In this view of the matter the Tribunal allowed the purchase cost of the film of Rs.60,000 as business expenditure for the year in which it was purchased. At the instance of the commissioner of Income-tax the question set out at the commencement of this judgment has been referred to us for our determination.
5. Mr. Joshi appearing for the revenue has stated before us that he did not wish to dispute the finding of fact that has been recorded by the Tribunal that the film, 'Pomposh', was purchased by the assessee-company to serve as a model for exhibition to its customers by way of an advertisement. But, even so, according to him, the acquisition of that film at the cost of Rs. 60,000, which was made just three months after the Film Center laboratory was purchased by the assessee-company from M/s. Patel India Ltd., was an acquisition of a capital asset with the help of which the assessee-company desired to carry on its business by attracting future customers by exhibition of the said film to such customers and, therefore, the expenditure incurred could not be regarded as revenue expenditure but was capital expenditure. He did not dispute that the expenditure could be regarded as having been laid out wholly and exclusively for the purpose of the assessee-company's business. But all the same, before such expenditure could be claimed as a deduction under section 10(2) (xv) it is absolutely essential that such expenditure should not be in the nature of capital expenditure. He therefore, contended that since the acquisition of the film, 'Pomposh', was an acquisition of a capital asset with the help of which the assessee-company was going to carry on its future business, the expenditure incurred should be regarded as in the nature of capital expenditure and, therefore, not a permissible deduction under section 10(2) (xv) of the Act.
6. On the other hand, Mr. Kolah, appearing for the assessee-company, has urged before us that the Tribunal had found as a fact that the assessee-company had purchased the colour laboratory in question from M/s. Patel India Ltd. as also the film, 'Pomposh', which was the first gevacolour film processed by M/s. Patel India Ltd. in that laboratory, and that the said film has been purchased by the assessee-company to serve as a model for exhibition to its customers by way of advertisement, that is to say, it had been purchased to prove to its customers by showing the same to them that by use of the same machinery and laboratory, colour films of that type and mark could be produced. He, therefore, urged that since the film had been acquired by the assessee-company for advertisement purpose, the expenditure incurred for the purchase of the film should also be regarded as part and parcel of the advertisement expenditure incurred by the assessee-company. If that were so, all advertisement expenses will have to be regarded as business expenditure or revenue expenditure allowable under section 10 (2)(xv) of the Act. He further contended that in fact no materials had been placed on record by either party which would have a bearing on the question as to whether any benefit of an enduring nature can be said to have been acquired by the assessee-company by purchasing the film in question and if that aspect of the matter had been gone into before the lower authorities, the assessee-company would have placed material on record to show that what they had acquired by spending a sum of Rs. 60,000 was not a benefit of an enduring nature for the film, 'Pomposh', had already proved a flop and could not have lasted for more than a couple of years even for advertisement purposes for which the same had been acquired. In the circumstances, he contended, the expenditure incurred for purchasing the film in question has been rightly held by the Tribunal to be a business expenditure or expenditure in the nature of revenue and has been rightly allowed by the Tribunal.
7. It is true that the aspect as to whether by purchasing the film in question the assessee-company had acquired a benefit of an enduring nature or not was never considered by any of the authorities below and material bearing one way or the other on this aspect had not been placed on record by either of the parties. However, the question, which has been posed for our opinion in this reference, is capable of being disposed of on the materials which are available on record. As was fairly conceded by Mr. Joshi, it cannot be disputed that the film, 'Pomposh', was purchased by the assessee-company to serve as a model for exhibition to its customers by way of advertisement and, therefore, the expenditure could be said to have been laid out wholly and exclusively for business purpose. But even so, the question is as to whether the expenditure incurred is a capital expenditure or a revenue expenditure and that will depend upon the nature or type of the asset acquired by the assessee-company by incurring the expenditure in question. It is an admitted position that it was in August, 1955, that the assessee-company had purchased the processing and printing laboratory known as Film Center from M/s. Patel India Ltd. It is also not in dispute that about three months later, that is to say, three months after the acquisition of the Film Center laboratory, by an agreement dated 1st November, 1955, the assessee- company had purchased the film, 'Pomposh', from M/s. Patel India Ltd. for sum of Rs. 60,000. Admittedly, the film, 'Pomposh', was not purchased by the assessee-company for doing any business of exhibiting that film in the sense in which exhibition of a film is normally understood. It was purchased by the assessee-company for the purpose of advertisement in order to attract future customers for its business of doing colour processing work at the Film Center laboratory. In our view, it cannot be disputed that even for advertisement purpose assets can be acquired by incurring expenditure in that behalf and, in the instant case, the film, 'Pomposh', will have to be regarded as having been acquired as a capital asset by the assessee-company by incurring expenditure of Rs. 60,000 in that behalf. The asset, viz., the film, 'Pomposh', could not be said to have been acquired as an asset in which the assessee-company was dealing. Nor was it going to deal with this item as a stock-in-trade, but it had acquired this asset for advertisement purposes with the help of which the assessee-company was going to carry on its business and in that sense the expenditure incurred for acquiring this asset will have to be regarded as a capital expenditure and not a revenue expenditure. It is true, as has been pointed out by Mr. Kolah, that whatever expenditure is normally incurred for advertisement purpose by an assessee is regarded as revenue expenditure and is allowed as business expenditure. But the question in the instant case in whether the expenditure incurred for acquiring the film, 'Pomposh', could be regarded as an advertisement expenditure, and, in our view, it cannot be so regarded. By purchasing the film the assessee-company did not indulge in any advertisement at all, but advertisement was to be indulged in after the asset was acquired by the assessee-company was a capital asset to be used for the purpose of advertisement of the business that the assessee-company was going to carry on in future and, therefore, the expenditure will have to be regarded as a capital expenditure and not revenue expenditure.
8. In this view of the matter, we feel that the Tribunal was not right in allowing the purchase cost of the film, 'Pomposh', to be deducted in computing the business income of the assessee-company for the assessment year 1956-57. We, therefore, answer the question referred to us for our opinion in the negative and against the assessee-company. The assessee-company will pay the costs of the reference to the revenue.