1. The question that has been referred for our determination at the instance of the revenue is an under :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 42,338 was properly allowed as a deduction in making the assessment for the assessment year 1953-54 ?'
2. For this assessment year the relevant accounting period consists of only eight months from April 1, 1952, to November 31, 1952. The assessee-firm consists of two partners, one Kamini Kaushal, a film actress, and one P. N. Arora, a film producer. Under the agreement of partnership dated May 3, 1951, the firm was constituted with a view to produce only one talkie picture called 'Poonam'. The picture was to be produced under the banner of 'Kayarts'. Each of the partners was entitled to 50% share in the profits of the business and, in addition, Kamini Kaushal was to later on named 'Poonam' commenced in June, 1951. It was completed and released in November, 1952. According to the books of the assessee there was a total loss in the business of Rs. 1,32,719. The assessee-firm did not file any return claiming loss as the firm was not registered and, accordingly, neither the firm could get the benefit of loss nor even the partners of the firm. The assessment proceedings were commenced under section 34 of the Indian Income-tax Act, 1922. Notice was issued for both the assessment years 1952-53 and 1953-54. For the first assessment year the assessee-firm filed a return showing nil income for the second assessment year it filed a return showing a loss of Rs. 3,268. Both those returns were filed on the same day, i.e., on October 29, 1958. Thereafter, the assessee-firm revised its return for the assessment year 1953-54 showing a loss of Rs. 1,07,594. This return was filed on March 31, 1959. It also revised the return for the assessment year 1952-53 showing a loss Rs. 42,338. This return was filed on January 14, 1960. For the assessment year 1952-53, the Income-tax Officer did not make any order and made an endorsement to the following effect :
'The action under section 34(1)(a) was initiated in this case after obtaining the approval of the Commissioner of Income-tax. The action is hereby dropped.'
3. On an appeal by the assessee, the Appellate Assistant Commissioner dismissed the appeal and no final proceedings were adopted in respect of the year The matter ends there.
4. For the assessment year 1953-54, the Income-tax Officer made an order on February 28, 1962, showing the total income under assessment at the figure of Rs. 66,431. The Income-tax Officer rejected the contention of the assessee and held that the entire loss claimed by the assessee for the assessment year 1953-54 could not be allowed inasmuch as a part of the same related to the earlier assessment year 1952-53. He took the view that the accounting period for the assessment year 1953-54, commenced on April 1, 1952, and ended on November 30, 1952, during which period the venture was closed. He, therefore, took the view that any expenses pertaining outside this period as relates to establishment of the concern cannot be considered in the year in question, i.e., assessment year 1953-54. On a appeal by the assessee the Appellate Assistant Commissioner accepted the contention holding that in regard to a picture the result had to be considered as a whole and not piece-meal. He was not impressed with the argument of the Income-tax Officer that the expenses incurred during the period June 1, 1951, to March 31, 1952, should not be allowed to be included in the cost of the picture. As the entire expenses had been incurred for producing a single picture it would not be correct to draw a distinction between establishment expenses and actual cost of production. He, therefore, followed a sum of Rs. 42,338 as a deduction. On second appeal by the revenue before the Tribunal, the Tribunal pointed out that although the production of a picture may start at a given point of time, if the business is only that of production of that picture, it cannot be said until the picture is completed and released that their the business has produced profit or has resulted in a loss. Even before the Tribunal, the Income-tax Officer did not object to the full allowance being given for the expenses of the cost of production, i.e., the direct expenses that were incurred for the purpose of producing the picture for the entire period June 1, 1951, to November 30, 1952. However, the distinction sought to be made by the Income-tax Officer in respect of what are called establishment expenses was not accepted by the Tribunal. The Tribunal pointed out that in the business of production of a picture, there can be no such question of direct and indirect expenses and, therefore, no question of a gross profit and a net profit in relation thereto. Looking at the very nature of a trading activity of production of a picture, whether a picture will result in a net profit or loss cannot be ascertained until it is completed and released. When there was a single venture to produce an isolated picture, until the picture was completed and released neither profit could be ascertained nor loss could be ascertained. The Tribunal accordingly concurred in the view taken by the Appellate Assistant Commissioner that the assessee-firm was entitled to a deduction for the expenses of Rs. 42,338 incurred during the period June 1, 1951, to March 31, 1952. It is out of this order of the Tribunal that the above question has been referred for our determination.
5. Mr. Joshi submitted that undoubtedly at one time the view held was that in case of single venture in the nature of trade, the question of assessing profits arises only when the venture comes to an end, but he submitted that in a later decision the Supreme Court has taken a contrary view. His submission relying upon this decision of the Supreme Court was that it was not correct to say that the profits of the adventure could be determined only at the time of the completion of the entire venture. For income-tax purposes each year was a self-contained unit and in the case of a trading adventure, for computing the true profits of the year the value of the stock-in-trade at the beginning and at the end of the accounting year had to be taken into account. He, therefore, submitted that having regard to this later view taken by the Supreme Court the Tribunal was not justified in accepting the contention of the assessee and in allowing a deduction in respect of the expenses of Rs. 42,338.
6. In In re K. H. Mody : 8ITR179(Bom) , a Division Bench of this court while considering the case of assessment in respect of an income arising out of a purchase of a large area of land with borrowed capital and sale of plots for building purposes, has taken the view that, when there is a single venture in the nature of trade, the question of assessing profits arises only when the venture comes to an end. This case related to a question where a large inam village comprising of several hundred acres of land was purchased and thereafter it was divided into plots and plots were sought to be sold. The Divisions Bench in this case took the view that as the transaction was not completed could not be said on the facts stated that the amount sought to be taxed represented profits. A somewhat similar case in respect of a venture in the nature of trade whereby vast areas of land were purchased and they were sought to be divided, came up for consideration before the Supreme Court in P.M. Mohammed Meerakhan v. Commissioner of Income-tax : 73ITR735(SC) . The Supreme Court took the view that the transactions of the assessee constituted an adventure in the nature of trade and were in the course of a profit-making scheme. The Supreme Court concurred with the view that was taken by the Income-tax Officer by holding that the Income-tax Officer had correctly estimated the profit of the assessee by treating the land as stock-in-trade and valuing it according to the normal accountancy practice. The Supreme Court held that it was not correct to say that the profit of the adventure could be determined only at the time of the completion of the sale of the entire estate. Each year was as self-contained unit and in the case of the trading adventure, for computing the true profits of the year, the value of the stock-in-trade at the beginning and at the end of the accounting year had to be taken into account.
7. Both these cases related to the question of assessment of income arising out of sale of plots carved out from a much larger estate. Such a transaction cannot be compared with a venture for production of a single picture. The very concept of production of a picture is such that no piecemeal sale can be effected thereof. Whether the entire venture had resulted in the profit or loss to the assessee can only the be determined when the picture is completed and it is finally released. Till then, it will not be possible for anybody even to surmise whether there will be profit or loss in such a venture. It should not be overlooked that even the Income-tax Officer himself was not opposed to the cost of production of the picture being taken into account for the entire period in which the picture was produced, but he only raised an objection to the establishment expenses for the period June 1, 1951, to March 31, 1952, being taken into account. Such artificial differentiation between the two costs was not permissible especially when there is a single venture and the entire cost is incurred for the production of the picture. In the case of such a transaction the net profits or loss can only be ascertained upon completion of the picture and the release thereof. Thus, the Tribunal was justified in allowing the amount of Rs. 42,338 as expenses incurred by the assessee during the period June 1, 1951, to March 31, 1952, for the assessment year 1953-54. Thus, our answer to the question referred is in the affirmative and in favour of the assessee. The revenue shall pay the costs of the assessee.