1. The above three departmental appeals are directed against the orders of the AAC for the wealth-tax assessment year 1975-76.
2. The three assessees were partners in the firm, Film Angels, which was deriving income from distribution, exploitation and exhibition of certain films in the territory of Delhi and Uttar Pradesh. The valuation dates in all the three cases was 31-3-1975. The assessee had filed wealth-tax returns on the basis of the assessee's interest in the above firm. The WTO found that at the relevant time the firm, Film Angels, was having distribution rights in respect of the following four films: Name of the picture Date of release3. Chhoti Bahan.
16-7-19724. Kahani Kismat Ki.
April 1974 The WTO was of the view that the value of the distribution rights over the unexploited period under the various agreements was an asset of the firm and that asset was not indicated in the balance sheet and consequently, not in the net wealth returned by the assessees. The WTO considered the agreement particularly in respect of the film 'Kahani Kismat Ki', and enumerated some of the clauses of the agreement for the distribution of the above picture. He found that the right to distribute, exhibit and exploit the said picture was for a period of 10 years from the date of delivery of prints of the said picture to the distributor. The agreement further specified the sums to be paid for the above rights and the manner in which it was to be paid and the stages at which the instalments were payable. The WTO held the term 'property' and the term 'asset' had widest import and included the property of every description. He further held that the interest in the property was also an 'asset' and ownership consisted of a bundle of rights in respect of the particular asset. In view of this, the right of the firm to exploit the film for a particular period was an asset on the relevant valuation date and such asset had to be taken into consideration in ascertaining the 'net wealth' of the firm and consequently of the partners. The WTO referred to the decision of the Supreme Court in the case of CIT v. A. Krishnaswami Mudaliar  53 ITR 122 where it was held that the value of the right to exploit a film for a particular period had to be taken into consideration as the closing stock for ascertaining the profit earned by the persons who carry on the business of distribution and exploitation of films. The WTO, therefore, came to the conclusion that the right to exploit films under agreement was a valuable asset though by its nature it was a wasting asset. He rejected the plea of the assessee that the firm was only an agent of the producer. He further held as untenable the plea of the assessee that the firm, Film Angels, was merely a licencee of the producer. According to him, the fact that the right was not transferable under the agreement cannot lead to the inference that it was not an asset or that it had no value.
3. The WTO then proceeded to value this right in the hands of the firm and whereas in the case of the picture Kahani Kismat Ki, he estimated the value of the right at Rs. 22 lakhs, he determined the value of rights in other films also and the overall value of these rights was found by him to be Rs. 24 lakhs. The share of different partners was taken according to their profit-sharing ratio. In each case, thus, there was an addition of Rs. 8 lakhs to the wealth of the three assessees.
4. In appeal, the AAC took a note of Rule 9B of the Income-tax Rules which lays down a statutory basis for amortising the cost of the films.
He found that according to the rule, if a film is released for exhibition on a commercial basis at least for 90 days before the end of the previous year, the entire cost of acquisition of the film was to be allowed as deduction in computing the profits and gains of such previous year. On the basis of the above rule, which was found to be effective for the year in question as well, the whole of the cost of acquisition of the film was to be written off in the first year itself.
In such a case, right to exploit the film would find no place in the firm's account by way of closing stock or in the balance sheet. Before the AAC, reliance had been placed on an order of the Tribunal, Delhi Bench, which in WT Appeal No. 577 (Delhi) of 1977-78, dated 23-5-1979 had held that having regard to the provisions of rule, the distribution right in a film had no value at the end of the year and the partners could not be held to have any interest in the value of such an asset.
Following the above decision, the AAC accepted the plea of the assessee and held that it was not to be added in computing the wealth of the partners of the firm, Film Angels.
5. When the case came up for hearing before the Division Bench, a plea was made for the reconsideration of the decision by the Division Bench of the Tribunal which has been followed by the AAC. The Divison Bench referred the matter to the President for the constitution of the Special Bench and the matter has, therefore, come up before this Bench.
6. Shri S.D. Kapila, the learned departmental representative, submitted that there could not be any manner of doubt that the firm in which the assessees were partners had a right to exploit certain pictures for a period of 10 years and these rights in respect of these pictures was certainly 'property' which has to be considered for the purposes of wealth-tax. He took us to the definition of term 'asset' as given in the Wealth-tax Act and pointed out that the definition is inclusive and property of every description, movable or immovable, is included in it.
He further contended that such an asset has value as the right to exploit a commercial asset is a valuable asset. In this connection, he drew our attention to the decision of the Supreme Court in the case of A. Krishnaswami Mudaliar (supra). In this case, a firm which carried on business of exploiting a motion picture and maintained its accounts on cash system, returned some profit after debiting the price paid for the exploitation rights of the film but without taking credit for the value of the unexpired exploitation rights at the end of the accounting period. The ITO estimated the value of the unexpired exploitation rights of the film at the end of that period and added it to the income returned by the firm. This was upheld by the Supreme Court which observed that whichever method of book keeping is adopted, in the case of a trading venture, for computing the true profit of the year, the stock-in-trade must be taken into account. It was contended by the learned departmental representative that according to this decision of the Supreme Court the closing stock of the unexploited right had to be taken into consideration for working out the profit and such a right was valuable asset at the end of the year. It was further contended by him that a particular asset might be fully depreciated or amortised for the purposes of income-tax assessment but it could not mean that the asset has ceased to exist or it had no market value. In this connection, he referred to certain provisions in the Income-tax Act, particularly the depreciation allowed on ships on straight line method and the provisions such as contained in Section 35E of that Act. It was contended that these provisions were made for special purposes and they could not lead to an inference that the asset in question had no value for the purposes of the Wealth-tax Act.
7. The learned departmental representative referred to the provisions of Section 7(2) of the Wealth-tax Act, 1957 ('the Act'), which provides for the net value of the assets of a business to be taken having regard to the balance sheet of such business and after making such adjustments as may be prescribed. In this connection, he made a reference to the rules and submitted that Rule 2 and the succeeding rules have to be taken into consideration. He contended that there were certain adjustments which were contemplated under the rules and in this connection he relied on Rule 2B(2). This rule provides for adjustments in the value of an asset disclosed in the balance sheet and it provides that where the market value of an asset exceeds its written down value (WDV) or its book value or the value adopted for the purposes of assessment under the 1961 Act, by more than 20 per cent, the value of that asset shall, for the purposes of Rule 2A, be taken to be its market value. It was contended by him that even if under the 1961 Act, the cost of an asset was to be written off completely, the market value on the valuation date had to be taken where the market value exceeded the book value or WDV by 20 per cent. He further referred to Rule 2C and submitted that Clause (d) of the above rule would apply to the present case as the asset in question was not covered under Clauses (a), (b) and (c). On the basis of the above submission, it was contended that the market value of the rights of distribution and exploitation of film for unexpired period had to be adjusted under the above rule.
8. The departmental representative also submitted that the accounts in the name of the pictures was being maintained and some balances do appear in the balance sheet. Taking these to be the value of the pictures, the departmental representative argued that Rule 2B should be applied. In the alternative, it was submitted that in case this asset was not disclosed in the balance sheet, Rule 2C would be applicable and that would justify an adjustment under Clause (d) of that rule. It was further contended that the right being a valuable right of business, it could not be left out while drawing up the balance sheet and it had to be shown or disclosed in the balance sheet, even if its value was to be shown at zero. He contended that the words 'an asset not disclosed in the balance sheet' should be given its normal meaning and not restrictive meaning. Any asset which is not shown in the balance sheet should be taken as not disclosed in the balance sheet and the interpretation that the assets should be such which are required to be disclosed in the balance sheet was not justified by the language of the section or the rule.
9. In this connection, the learned departmental representative made a reference to the orders of the Tribunal in the case of N.M. Shah v.Second WTO  1 ITD 244 (Bom.) (SB) and also the decision in the case of Rajendra Kumar Tuli v. Eighth WTO  1 ITD 213 (Bom.). He submitted that in the case of N.M. Shah (supra), the system of accounting was cash whereas in the present case the firm was following mercantile system of accounting. It was, therefore, contended that the principles laid down in the above case would not apply to the present case. In this connection, he made a reference to the order of the Tribunal and the summary in para 40 of that order where the answer to the main question was made dependent on the fact that the accounts were maintained regularly under the cash system. Regarding the decision in the case of Rajendra Kumar Tuli (supra) it was contended that it had no application.
10. In the end, the departmental representative made a reference to the decision of the Supreme Court in the case of Mrs. Khorshed Shapoor Chenai v. ACED  122 ITR 21 and submitted that like right to compensation the present right for exploiting the film for certain number of years had also value and where the cost was allowed to be written off under the Income-tax Act, it did not mean that the asset itself is written off.
11. The learned Counsel for the assesses submitted that this was one of the rare cases where an effort has been made by the revenue to bring under the wealth-tax net, the value of such rights in the exploitation of pictures. He pointed out that in the present case itself, in the immediately preceding year and the succeeding year the value has been taken at zero by the AAC and the department has not filed any appeal.
He contended that the cost of acquisition of rights in such pictures has been allowed to be amortised for income-tax purposes by the circulars of the Board which have been issued from time to time. He, however, pointed out that Rule 9B was inserted by the Income-tax Seventh Amendment Rules, 1976. He pointed out that according to that rule where the assessments of an assessee were pending and the assessee exercised the option, the above rule would be applicable. He pointed out that for the assessment year 1975-76, the assessment was made after the rules came into force and hence the rules were applied. The learned Counsel for the assessee further submitted that the assessee had never shown in the balance sheet the right under the distributionship agreements and only the receipts and payments or income and expenditure was taken to the accounts of different films according to the incurring of such expenses. He further contended that under Section 7 or the rules, such assets could not be taken into consideration for computing the net wealth. According to the learned Counsel for the assessee, this was not an asset which was required to be disclosed in the balance sheet.
12. The learned Counsel for the assessee also submitted that before valuing this asset it was obligatory on the part of the WTO to make a reference to the Valuation Officer and as no such reference was made, addition was bad in law and should be deleted on that ground itself. In this connection, reliance was placed on the order of the Tribunal in WT Appeal Nos. 1063 and 1068 of 1980, where Delhi Bench 'E' has held that where no such reference is made under Section 16A of the Act, the value shown by the assessee should be accepted.
13. We have carefully considered the arguments of the learned departmental representative as well as the learned Counsel for the assessee. The questions which arise for determination in this case are whether in the hands of the firm the right to exploit a cinema film in a particular territory for a period of time is an asset on the relevant valuation date. The second question which arises is, in case such a right is an asset, whether its value has to be included in the computation of net wealth of the firm and consequently of its partners.
The definition of term 'assets' is inclusive and is very wide as property of every description has been included and there are only specific exclusions. It is beyond doubt that the rights to and interests in concrete things is property and different bundles of rights would constitute distinct assets within the meaning of the definition given in Section 2(e) of the Act. The nature of rights of exploitation of a film was considered by the Madras High Court in the case of M.S. Subbulakshmi v. CIT  28 ITR 561 and the High Court had held that such right was an incorporeal right and in the case of a concern carrying on film distribution business, its stock-in-trade would consists of such assets. In another case, i.e., in the case of A.Krishnaswami Mudaliar (supra), the Supreme Court had an occasion to consider the question of the determination of income in the hands of a firm having exploitation rights in a cinematograph film. The Supreme Court had held that the value of the rights in the film for the unexpired period would represent the closing stock and had to . be taken into consideration for determination of income. This would, thus, be clear that the right in a cinema film in a particular territory for a period would be an asset. Such an asset may or may not be transferable as such. Such asset might also have some value depending on the circumstances of the case.
14. Here, however, we have to determine the true meaning of the term asset and the question of its inclusion in the context of the scheme of the Act. It is clear from the charging section that the charge is imposed not on the assets comprised in the term 'net wealth' but on the valuation of the assets minus debts. The value of the assets has to be determined in accordance with the provisions of Section 7. If an asset cannot be valued in accordance with the provisions of Section 7, it cannot be taken into consideration for computing the net wealth of an assessee.
15. The assessees in the present case are partners in the firm, Film Angels. This firm maintains regular books of account and prepares balance sheet of its business. Section 7 provides that the value of any asset shall be estimated to be the price which it would fetch if sold in the open market on the valuation date. However, in the case of an assessee carrying on a business for which the accounts are maintained by him regularly the WTO may, instead of determining the separate value of each asset held by the assessee in such business, determine the net value of the assets of the business as a whole having regard to the balance sheet of such business as on the valuation date and making such adjustments therein as may be prescribed. The determination of the value has, therefore, to be in accordance with the rules made in this behalf. The method laid down for valuing the business assets as a whole is called global valuation. In the present case also, the WTO has proceeded to determine the wealth on the basis of the balance sheet though he made a separate addition on account of value of the rights of exploitation of certain films. There is no dispute in the present case that Section 7(2) is applicable and has been applied.
16. For valuing the interest of a partner in a partnership the relevant rule is Rule 2. This provides that the net wealth of the firm shall first be determined. The rule, thereafter goes on to provide for the manner of the valuation of partners interest in the firm. Rule 2A provides that in the case of global valuation, the WTO shall make the adjustments specified in rules 2B, 2C, 2D, etc. Rule 2B provides for adjustments in the value of an asset disclosed in the balance sheet and Rule 2C provides for adjustments in the value of an asset not disclosed in the balance sheet. It is clear from the discussions in the assessment order that according to the WTO the asset in the shape of right to exploit certain films in certain territories for specified period had not been shown in the balance sheet of the firm. It was for this reason that when he determined the value of the right of Film Angels in various pictures at Rs. 24 lakhs, he proceeded to include its one-third share in the hands of each partner. From the perusal of the balance sheet of the firm, it is clear that such right has not been shown as an asset in the balance sheet and the WTO has, therefore, made the above adjustment on the ground that this was an asset not disclosed in the balance sheet. The WTO, however, does not make a mention of any rule or the position of the balance sheet in his order. However, he has exercised his power obviously under the law and rules which were applicable.
17. Now the question which arises for our consideration is whether the adjustment made by the WTO was legally correct. At this stage we may reproduce rules 2B and 2C of the Wealth-tax Rules: 2B. (1) The value of an asset disclosed in the balance sheet shall be taken to be-- (a) in the case of an asset on which depreciation is admissible, its written down value; (b) in the case of an asset on which no depreciation is admissible, its book value; (c) in the case of closing stock, its value adopted for the purposes of assessment under the Income-tax Act, 1961, for the previous year relevant to the corresponding assessment year.
(2) Notwithstanding anything contained in sub-rule (1) where the market value of an asset exceeds its written down value or its book value or the value adopted for purposes of assessment under the Income-tax Act, 1961, as the case may be, by more than 20 per cent, the value of that asset shall, for the purposes of Rule 2A, be taken to be its market value.
2C. The value of an asset not disclosed in the balance sheet shall be taken to be-- (a) in the case of a debt due to the assessee, the amount due to the assessee under that debt, and where such amount or part thereof has been allowed as a deduction under Clause (vii) of Sub-section (1) of Section 36 of the Income-tax Act, 1961, in computing the total income of the assessee for the relevant year for the purposes of assessment under that Act, the amount of the debt as reduced by the deduction to be allowed; (b) in the case of goodwill purchased by the assessee for a price, its market value or the price actually paid by him, whichever is less; (c) in the case of managing agency rights purchased by the assessee for a price, its market value or the price actually paid by him, whichever is less; (d) in the case of any other asset, its market value on the valuation date.
18. As discussed above, Rule 2B will not be applicable in respect of this asset as such asset was not disclosed in the balance sheet. Now the question which arises is whether such an adjustment could be made under Rule 2C. This rule provides for adjustments in the value of an asset not disclosed in the balance sheet. An asset which is not required to be disclosed in the balance sheet cannot be covered under this rule unless specifically provided. The scope of this rule and its application came up for consideration before the Special Bench of the Tribunal in the case of N.M. Shah (supra). In that case the question for consideration was whether the assessee's share in the outstanding fees of the firm of Chartered Accountants could be included in the assessee's wealth on the relevant valuation date. Though in that case, the firm was maintaining accounts on cash system and the Tribunal proceeded to decide the issue involved in that specific case having regard to that specific fact, it laid down certain principles interpreting the relevant rules. They observed: . . . We shall latter advert to the question as to whether an outstanding fee of a professional maintaining accounts regularly under the cash system can be regarded as a debt so as to constitute an asset in the balance sheet or not and refer to the authorities based on accounting principles and rulings but we shall at this stage consider the contentions of the parties based on the provisions of Rule 2C which provides for adjustments in respect of an asset not disclosed in the balance sheet. Though it is true, as contended by the learned standing counsel, that the words not disclosed' does not necessarily mean an erroneous or wilful omission of an assessee to disclose an asset in the balance sheet and may simply mean 'not appearing' or 'not shown', it is not possible for us to hold that it also contemplates an asset which has not been disclosed because it is not required to be disclosed according to the system of accounts maintained by the assessee. As we have seen Section 7(2) is a special provision in regard to the determination of the value of assets of a business and the scope of consideration and the ambit of application thereof is the balance sheet maintained according to the system of accounting. Therefore, it follows that the assets which are not disclosed, whether by mistake, or deliberately, and which need adjustment, would only mean assets which require to be disclosed according to the method of accounting but have not been so disclosed. If this is the correct position, as we hold it to be, then it is clear that the WTO cannot bring in any debt either under Clause (a) or under Clause (d) by way of an adjustment as an asset not disclosed in the balance sheet for it would amount, as rightly contended at Bar on behalf of the assessee, to cutting at the very root or (he basis, namely, altering the system of accounts maintained for the business and determining the value not warranted by the provisions of Section 7(2). The Karnataka High Court's decision in Mirji's case (supra) supports this view. It is to be noted that rules 2A to 2G provide for adjustments not only of assets and liabilities not disclosed in the balance sheet but also of assets and liabilities disclosed in the balance sheet, Rule 2B which provides for adjustments on the value of assets disclosed in the balance sheet states how an asset on which depreciation has been allowed and an asset on which no depreciation is admissible have to be valued and what is the value of the closing stock in the accounts, According to the said rule, where an asset is entitled to depreciation, the value to be taken is its written down value; in the case of an asset which is not entitled to depreciation its book value has to be taken and in the case of closing stock the value to be taken is that adopted for the purpose of the Income-tax Act.
These values do not represent market values. The rule provides that only if margin of market value and the value so taken exceeds 20 per cent of such values, then market values have to be taken....
19. The Tribunal further proceeded to observe that in respect of an asset of the nature falling under Clauses (a), (b), (c) of Rule 2C there can be adjustment only under those clauses and not under Clause (d) of Rule 2C. From the above discussion in the order of the Tribunal in the case of KM. Shah (supra), it would be clear that the adjustment contemplated in Rule 2C would be only in respect of such assets which are required to be disclosed in the balance sheet having regard to the system of accounting followed by the assessee. This brings us to the nature of the asset which is the subject-matter of controversy in the present case. The firm Film Angels entered into agreement with the producers and copies of the agreement have been placed before us. All the agreements are more or less in same terms. All the agreements are on the basis of the minimum guarantee which the distributors agreed to pay to the producers for the various rights in respect of specific pictures. All the agreements provides for exploitation rights in specified territory for a period of 10 years. The minimum guarantee has, however, to be paid within a short period of few months after the release of the film. Payments are made even before the release. A perusal of the assessee's accounts from year to year shows that the minimum guarantee paid is straightaway taken into the profit, and loss account and it is not reflected in the balance sheet. The treatment of the payments made by the distributors to the producers in respect of exploitation rights in respect of a picture has been subject-matter of several Board's circulars. Earlier the circulars provided for amortisation of the cost of acquisition of distribution rights in three years in respect of A-class feature films and in one year in respect of film falling under B & C categories. Later on, according to the Board's circular issued in 1974, the cost of distribution was to be allowed on the basis of collections during the period of exploitation of the film and where there was evidence that the film had failed at the box-office, the cost was to be allowed in the first year itself. These circulars were ultimately replaced by Rule 9B of the Income-tax Rules.
Though this rule came into force in 1976, in respect of pending proceedings the rule could be applied to the assessment year 1973-74 onwards where the film distributors exercised an option for being assessed in accordance with the rule. In the present case, the assessment was made after the rules had come into force and there was no disallowance of any claim of minimum guarantee in the income-tax assessment. The profit has been worked out in the assessee's book as well as in the income-tax assessment after deducting the whole of the minimum guarantee amount as per the agreement.
20. According to Rule 9B, where a feature film is acquired by a distributor in any previous year and in such previous year the film distributor sells all the rights of exhibition of the film and the film is released for exhibition on a commercial basis at least 90 days before the end of the previous year, the entire cost of acquisition of the film shall be allowed as a deduction in computing the profits and gains of such previous year. The effect of this rule which is admittedly applicable to the year in question is to treat the entire cost of acqusition of the film as revenue expenditure, except in very small minority of the cases. Here, we are not concerned with those exceptional cases. Here the three films in respect of which the firm had distribution rights had been released a few years prior to this year and in respect of the 4th it had been released at the beginning of the current year with the result that it has been exploited for more than 11 months in this year. Thus, according to this rule, the cost of acquisition could be fully claimed as a deduction in the year in question itself. If an assessee writes off the cost of the film by debiting it fully to the profit and loss account, no fault can be found with such treatment and no balance will remain representing an asset in the form of exploitation rights in the film. In such a case, the assessee is not required to ascertain the existence of this notional asset or to ascertain its value for disclosing it in its balance sheet.
21. A balance sheet is prepared to measure the exact financial position of a business on a certain fixed date. Items of revenue nature find place in the profit and loss account and only the balance of that account, whether it is profit or loss, is reflected in the balance sheet. One thing which is clear from the various instructions issued reganding the treatment of cost of acquisition of distribution rights of a film is that it is basically an expenditure of revenue nature though sometimes the benefit continues to be reaped by the assessee in more than one year. Where a business treats the cost of acquisition of exploitation rights as a revenue expenditure at the time of incurring it and takes it fully to the profit and loss account, the assessee is not required to disclose the value of the right for unexploited period on the date of the balance sheet. That is the position of all the expenses which are treated on revenue account We also find that in the income-tax assessment, the WTO has not tried to work out the profits by taking into consideration the value of the closing stock of the films or rights in those films. As far as income-tax proceedings are concerned, the principles laid down in the case of A. Krishnaswami Mudaliar (supra) stands modified as a result of insertion of Rule 9B.As observed by the Karnataka High Court in the case of A.T. Mirji v.CWT  126 ITR 93, the Wealth-tax Act and the Income-tax Act are cognate enactments. If. for the purposes of Income-tax Act the whole of the cost of acquisition has to be treated as revenue expenditure, it cannot be held that the assessee is still required to show the value of these rights in the balance sheet. Where an assessee is not required to show an asset in the balance sheet according to the prevailing law and he has also treated the whole thing on revenue account, Rule 2C would not apply as the WTO cannot make an adjustment in the balance sheet of the firm. We do not accept the plea on behalf of the revenue that Clause (d) of Rule 2C could be applicable in such a case, In view of the above position, we hold that the WTO was not justified in adding the value of the unexploited rights in the films in the net wealth of the firm and of its partners. The order of the AAC has, therefore, to be upheld.22. To summarize, our conclusion is that even though the right to exploit a particular film for a particular period is property, it is not such an asset whose value can be added by making adjustment to the balance sheet while acting under the provisions of Section 7(2)(a).
As we have decided the appeals on the basic issue we do not consider it necessary to consider subsidiary arguments advanced by the learned Counsel for the assessee.