Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Year in which allowable - Assessee, a film distributor, entered into an agreement for 10 years with a film producer - Producer sanctioned a sum of Rs. 2,25,000 towards publicity expenses of film during said period of 10 years - Agreement provided that assesses would be entitled to recoup publicity expenditure incurred from out of sale proceeds - Whether assessee could claim deduction of entire sum of Rs. 2,35,000 in first year itself when actual expenditure was only Rs. 18,365, on ground that assessee was liable to spend the amount as publicity expenses under the agreement - Held, no Facts The assessee, a film distributor, entered into an agreement on 25-12-1965 (with the producers), for 10 years with a film production company. The producer sanctioned a sum of Rs. 2,25,000 towards the publicity expenses of the film. The agreement provided that the assessee would be entitled to recoup the publicity expenditure incurred from out of the sale proceeds. In its return of income for the relevant assessment year, the assessee claimed deduction of the said amount of Rs. 2,25,000 on the ground that it was liable to spend the amount as publicity expenses of the film under the agreement dated 25-12-1965. The ITO, however, allowed only a sum of Rs. 18,000 on account of publicity because he found that a sum of Rs. 18,000 approximately was actually spent for publicity. On appeal, the AAC also held that the full amount of Rs. 2,25,000 sanctioned as publicity expenditure by the producer could not be allowed during the year under appeal inasmuch as the actual expenditure was only of Rs. 18,265. On second appeal, the assessee contended that the entire amount of Rs. 2,25,000 had to be spent for publicity of the picture over a period of ten years. The Tribunal relying on the decision of the Supreme Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 , held that the assessee was entitled to deduct the entire amount of Rs. 2,25,000 as part of the cost of the picture before its profit from the venture could be computed. On reference the assessee contended that it was following the mercantile system of…

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