V.S. GAITONDE, A.M. ITA No. 770 is filed against order of CIT, Pune, under s. 263 of IT Act for asst. yr. 1979-80, dt. 16th Aug., 1984. only point in dispute is regarding character of tax-in aid receipts. ITA No. 1527 is against order of CIT (A), Pune dt. 3rd July, 1985 for asst. yr. 1981-82 involving same point. ITA No. 745 is against order of CIT(A), Pune dt. 23 rd March, 1985 for asst. yr. 1982- 83. point in appeal is same apart from point regarding amortization. As we have decided question regarding amortization in assessee's own case in ITA No, 1526/PN/85 dt. 12th March, 1986 (Asst. yr. 1979-80), for reasons given therein we set aside order of CIT(A) and ITO on this point for asst. yr. 1982-83 with direction to re adjudicate on issue in terms of r. 9A(9), after hearing assessee. 2 . On main question, Sri Joglekar explained basic facts. assessee is film producer of Marathi pictures. Such producers face considerable hardships compared to producers of Hindi, Tamil or Telugu films. To mitigate hardships Government of Maharashra sanctioned scheme for granting of assistance, out of entertainment tax collected from picture of producer from earlier films. objective was to promote production of better film in Marathi generally as also to help production of Marathi coloured films in preference to black and while films. Rules provided for grant of certificate of eligibility for assistance under scheme, to extent of entertainment tax actually collected and credited to Government on exhibition of Marathi film produced by same producer and exhibited in Maharastra, during immediately preceding financial year less service and collection charges. Another condition was that producer would produce new film against production cost of which alone assistance would be released in four instalment. Certain ceilings were also prescribed. 3. In accordance with above scheme, assessee received amounts as below : Assessment year Amount 1979-80 Rs. 3,27,588 (+) 1,50,000 1981-82 Rs. 3,50,000 1982-83 Rs. 1,00,000 For earlier years and for 1979-80 ITO had accepted contentions but for asst. yr. 1979-80 CIT revised order under s. 263. technical objection was raised that action of CIT was not in terms of his initial notice. We do not however find any merit in this objection as it is accepted that assessee was fully apprised of all facts likely to be used in proceedings and that assessee was not disabled in any manner in presenting his case. 4 . Sri Jogler contended that there are not supplementary trading receipts as alleged by CIT relying on Agra Chain Mfg. Co. vs. CIT 1976 CTR (All) 415 : (!978) 114 ITR 840 (All) and Jeewanlal (1929) Ltd. vs. CIT (1981) 130 ITR 405 (Cal). Sri Joglekar submitted that this assistance is on par with Central subsidy given to industries in backward areas and held to be capital receipt vide CBDT Circular No. 142 dt. 1st Aug., 1974. He further pointed out that on earlier occasion, that Govt. had exempted grants-in-aid of similar nature (page 50 of compilation). Sri Joglekar was however good enough to admit that representation made to CIT, Bombay CIT III having jurisdiction over film circle, Bombay was turned down (pages 32-49 of compilation). Sri Joglekar conceded t h t issue has been decided against assessee by Tribunal in Sadichha Chitra (IT Appeal Nos. 1065 and 1 22 6 (Bom) of 1981, dt. 24th March, 1981). He however contended that matter requires review in light of certain aspects of facts and law not considered by Tribunal. 5. In case of film producer, although film is for technical purposes treated as stock-in-trade it is in reality property which always remains with assessee though prints of film would be circulated for commercial exploitation. film becomes stock-in-trade only after obtaining censor certificate. As entire tax-in-aid is received during production of film and prior to stage when firm becomes ready for commercial exploitation, receipts get stamp of capital receipts. In Sadichha Chitra's case (supra), Tribunal has not fully examined these aspects and has placed undue reliance on V.S.S.V. Meenakshi Achi & Anr. vs. CIT (1966) 60 ITR 253 (SC). This was case of chess levied on rubber and allowed to be utilise for maintaining rubber plantation. Tribunal has observed that counsel has not brought out any specific reason for not applying ratio of Meenakshi Achi's case (supra). Expenditure on maintenance of plantation is revenue expenditure. same cannot be said about grant-in-aid which is provided during production of film before it becomes stock in-trade. Sri Joglekar took us through various stages of production of film and forms used for applying for sanction of benefit of scheme in support of this contention. 6. Sri Joglekar then referred to other case law. In Karam Chand Thapar & Bors. (P) Ltd. vs. CIT (1971) 80 ITR 167 (SC), it is held that "ordinarily" compensation for loss of office or agency is regarded as capital receipt. It is for IT Department to establish that particular case falls under exception. This has not been done by revenue. Tribunal has decided Sadichha Chitra's case (supra) by applying only one test viz., connection of receipt with business. This is too broad approach to come to grips with special facts applicable to assistance of type received by assessee. earlier grants exempted by ITA were doubtless ad hoc grants but from that fact alone it cannot be said that character of receipt has changed. Amount given for applying capital for film production is thus capital receipt. 7. Sri Jogler next point out that ratio of Dharangadhra Chemical Works Ltd. vs. CIT 1977 CTR (Bom) 180 : (1977) 106 ITR 473 (Bom) is not applicable to facts of case as it dealt with subsidy for making up loss on sales made and on production. Similarly ratio of H.R. Sugar Factory (P) Ltd. vs. CIT (1970) 77 ITR 614 (All) is not applicable as it was concession on chess leviable on cane crushed up to particular period. This case law was referred by CIT(A) for deciding against assessee. 8 . In reply departmental representative supported decision of authorities below. In case of production of film fact that film constitutes stock-in-trade cannot be disputed. Both CBDT Circular 6 dt. 25th Feb., 1987 (page 19 of compilation) and Madras High Court judgment in CIT vs. Modern Theatres Ltd. (1963) 50 ITR 548 (Mad) state in no certain terms commercially accepted principle that notwithstanding retention of one original copy by assessee film itself is intended for total commercial exploitation, at end of which, there is little token value left. This is reason why depreciation allowed on capital assets is not allowed on film. Amortisation under r. 9A is allowed only as special case on stock-in-trade because life of film after particular period is illusory. old scheme of ad hoc grants is not to be mixed with present scheme which goes directly to reduce cost of film. Unlike old ad hoc scheme, which had element of uncertainly resulting in disability on producer to budget for new film in anticipation of ad hoc grants, new scheme is available only to old producer for 2nd or later films and directly linked to cost of production of film, though with certain ceilings etc. Which provide only scale of grant and which do not change character. subsidy is different from central subsidy for backward areas which are available to new industries as certain percentage of cost of machinery etc. (capital assets) installed. ratio of CBDT Circular regarding industrial subsidy is thus clearly inapplicable. 9 . It would be naivet to argue that Sadichha Chitra's case (supra) was decided by Tribunal in particular way on account of failure of counsel. Tribunal has taken note of all aspects including other case law. Bombay high Court judgment in Dharangadhra Chemical Works Ltd.'s case (supra) is clearly applicable to facts of case. Similarly V.S.S.V. Meenakshji Achi's case (supra) is correctly applied. fact that aid is being received in instalments during production of film is no ground for holding that it is capital receipt being contribution of capital for film. ratio of Karam Chand Thapar & Bros. (P) Ltd.'s case (supra) applies in case of managing agencies which are normally not treated as capital assets. question of proving exception by Revenue does not arise in case of production of film as stock-in-trade. other distinction made by Sri Joglerkar (vide para 7) is distinction without difference. 10. As alternative Sri Sathe contended that this receipt falls as business receipt under s. 28(iv). In reply to our query that s. 28(iv) may apply only to items whether convertible into money or not, and that there is no question of whether convertible into money or not, and that there is no question of conversion of cash Sri Sathe referred to Kerala High Court judgment in CIT vs. Forbes, Ewart & Figgis (P) Ltd. (1981) 24 CTR (Ker) 87 (FB) : (1982) 138 ITR 1 (FB) (Ker) where similar works in s.40A ("5) have been taken as including cash payments. He also referred to Metal Rolling Works (P) Ltd. vs. CIT (1983) 31 CTR (Bom) 116: (1983) 142 ITR 170 (Bom") regarding nature of import entitlement, as also other case law on point viz., CIT vs. Commonwealth Trust Ltd. (1982) 28 CTR (Ker) 311 (FB) : (1982) 135 ITR 19 (Ker) (FB), CIT vs. Kanan Devan Hills Produce Co. Ltd. (1979) 119 ITR 431 (Cal), CIT vs. Manjushree Plantation Ltd. (1980) 18 CTR (Mad) 70 : "(1980) 125 ITR 150 (Mad), CIT vs. Mysore Commercial Union Ltd. (1980) 20 CTR (Kar) 11: (1980) 126 ITR 340 (Kar). Sri Sathe admitted that CIT vs. Alchemic (P) Ltd. (1981) 20 CTR (Guj) 83: (1981) 130 ITR 168 (Guj) gives contrary view. 1 1 . In his rejoinder Sri. Joglekar stated that as positive film alone is exhausted, original negative which is not parted is capital asset and subsidy is given primarily for producing negative i.e. capital asset. Whilst admitting that Modern Theatres Ltd.'s case (supra) does hold film as stock-in- trade. Sri Joglerkar referred to earlier decision in Gemini Pictures Circuit Ltd. vs. CIT (1958) 33 ITR 547 (Mad) where film is treated as capital asset. According to him ratio of Karam Chand Tahpar & Bros. (P) Ltd.'s case (supra) still applied to facts of case. CBDT Circular No. 142 gives view on nature of receipt in form of subsidy and does not rest wholly on reason that industrial subsidy is capital only because it is given for first time and that too on basis of cost of machinery. Regarding s. 28(iv) Sri Joglekar relied on Alchemic (P) Ltd.'s case (supra). 12. We have examined facts and arguments. From subsidy scheme explained to us it is clear that it is provided as incentive to film producer to continue to produce quality films. salient features of scheme as per resolution dt. 28th Jan., 1975 and other resolutions and rules as under. scheme has come into effect from 1st April, 1975. For purpose of scheme word "producer of Marathi film" is defined under c. 1(2) to mean person who is shown as such on certificate granted to that film by Film Censor Board in relation to Marathi film produced and exhibited in Maharashtra, who is domiciled in State of Maharashtra for period not less than 15 years and who has been actively connected in any capacity with producion of Marathi film in Maharashtra for period not less than three years prior to date of this application under these rules. This clearly indicates that benefits of subsidy scheme are available only to those persons who are already in this line for at least, three years prior to date of application. clause regarding certificate of eligibility shows that producer is eligible to get certificate of eligibility for sum of money equivalent to total amount of entertainment duty actually collected and credited to Govt, on exhibition of Marathi film produced by him and exhibited in State of Maharsashtra, during immediately preceding financial year, less service and collection charges, as may be prescribed from time to time. Thus before getting any subsidy or grant producer must have already produced film and it is only with reference to entertainment duty actually collected and credited to Govt. Of that film which would be basis in granting subsidy or grant for next film produced by producer. amount of subsidy or grant varies as per cl 4(iv). subsidy or grant is given during completion of next film of producer in four instalments and last instalment is released only after new film is censored and actually released. Thus basis of grant as well as mode of paying it is to enable producer to keep on producing films which are in nature of stock in trade. scheme therefore is clearly for keeping producer in business and in that sense amounts constituted supplementary receipts of trade. In this behalf decision of Bombay High Court in case of Dhrangadhra Chemical Works Ltd. (supra) is relevant wherein Bombay High Court has held as under : "it is well settled that where subsidies or grants are given by Government to assist trader in his business, they are, generally speaking, payments of revenue nature. They are supplementary trade receipts and not capital payments although they might be called advances or might be subject to contingency of repayment". 13. Even assuming that original negative remains with producer, as negative is not end in itself but starting point for production of real thing required for commercial exploitation, activity of assessee- real thing required for commercial exploitation, activity of assessee- producer must be taken as production of films as stock in trade. case law regarding compensation, has to be examined with care as pointed out by departmental representative as it is applicable to cases where something is lost and one has to see whether what is lost creates gap in capital structure. In case before us nothing is lost by assessee. assistance is thus not in nature of compensation. What is received is incentive for producing quality film, which being stock in trade gives to subsidy unmistakable stamp of revenue receipt. various facts have been fully examined in Sadichha Chitra's case by Tribunal followings ration of V.S.S.V. Meenakshi Achi's case (supra) there is thus not reason to depart from same. case law and circulars relied upon by assessee have been fully distinguished by departmental representative as discussed above. We accordingly hold that impugned receipts bear imprint of trading business receipts and taxable as such. We also accept departmental representative s contention regarding taxability in terms of s. 28(iv) for reasons canvassed by him. decision of authorities is confirmed. Appeal for 1979-80 is treated as partly allowed and other appeals (for 1981-82) and 1982-83) are dismissed. T.A. BUKTE, J.M. I have carefully gone through order of learned Accountant Member. I have already agreed with him on ground No. 1 of appeal, i.e. on amortisation. However, I dissent on point of addicting capital receipt as revenue receipt. In short, issue is whether tax-in-aid is capital receipt or revenue receipt. 2 . assessee is Marathi film producer. He received following amounts from tax-in-aid scheme of Maharashtra Government resolution dt. 28th Jan., 1975 and other resolution and Rules made there under dt. 19th Feb., 1975 and other rules. Maharashtra Government intended to promote t h e production of Marathi films especially colour films which are lagging behind for want of capital to be invested in production : Assessment Amount 1979-80 Rs. 5,77,588 1981-82 Rs. 3,50,000 1982-83 Rs. 1,00,000 3. test to be applied for etermination of issue is propounded in case ofNational Cement Mines Industries Ltd. vs. CIT(1961) 42 ITR 69 (SC). Bombay High Court has also laid down similar test in case ofCIT vs. Mahindra & Mahindra Ltd.(1973) 91 ITR 130 (Bom) and in case ofBombay Burmah Trading Corporation Ltd. vs. CIT(1971) 81 ITR 777 (Bom). Bombay High Court has considered capital receipt and real nature of Revenue receipt. It is held that if ownership of asset remains with assessee, it is capital asset and if ownership of asset passes to user must us stock-in-trade. 4. assessee has received aid for production of negative film of picture which remains his property for ever. Therefore, ratio in case of Gemini Pictures Circuit Ltd. (supra) becomes applicable. It is held in case of Gemini Pictures Circuit Ltd. that negative film is capital asset. ld. departmental representative, Shri K.A. Sathe, has relied on and cited judgement in case of Modern Theatres Ltd. (supra). This judgment deals with positive film and distinguishes itself from Gemini Pictures Circuit Ltd.'s case (supra). 5. In case of Sadichha Chitra (supra) Bombay Bench has relied on decision of Supreme Court in V.S.S.V. Meenakashi Achi s case (supra). In that case, assessee could not give any reason for its non-applicability. learned advocate for assessee, Shri G.N. Jogelkar in present case has explained that expenditure on maintenance of rubber estate is clearly revenue expenditure and its reimbursement falls in Revenue income category. Therefore, according to him, ratio of V.S.S.V. Meenakshi Achi s case (supra) is not applicable to assessee s case. 6 . subsidies were given to make up losses in cases of Dhrangadhra Chemical Works Ltd. (supra) and H.R. Sugar Factory (P) Ltd. (supra) and therefore, those receipts were held as revenue receipts. assessee s case is distinguishable on facts from those cases as subsidy was not given to him to make up loss but to promote Marathi colour films. If subsidy would not have been given to promote production of films then assessee would not have been in position to produce films. Thus, there is distinguishable point between assessee s case and those cases. 7 . assessee has treated cost of film as capital asset and accordingly he has shown in balance sheet. Though it would not be necessary because of showing as capital receipt in balance sheet to hold it as capital asset and that it is not conclusive but relevant as per ratio of judgment in Karam Chand Thapar & Bros. (P) Ltd. vs. CIT (1971) 82 ITR 899 (SC). One more point is also necessary to consider that provisions of s. 28(iv) are not applicable to money received as held by Gujarat High Court in Alchemic (P) Ltd. s case (supra). 8 . There is no presumption of remaining of original negative with producer, but in fact is remains with him. Without negative, positive film cannot be brought into existence, though negative is starting point for production of real thing required for commercial exploitation. In my opinion, assistance is in nature of subsidy for acquisition of capital asset for producing quality film. negative cannot become stock-in-trade. Sometimes, assessee would be required to pay taxes earlier than subsidy is received in his hands. Under no circumstances such occasion should arise. 9 . In view of distinction between Sadichha Chitra and assessee s cases, I am of opinion that decision of authorities below requires to be interfered on this point. assessee succeeds on point of capital asset and appeals are partly allowed. REFERENCE UNDER SECTION 255(4) OF IT ACT, 1961 We have tried our best through mutual discussions etc. to arrive at agreed decision. We have however, found ourselves in respectful disagreement with each other. Accordingly, we refer to learned President under s. 255(4) of IT Act, 1961, following question : "Whether amount received by assessee from Government of Maharashtra in terms of its resolution dt. 28th Jan., 1975 and rules made thereunder, bears character of capital receipt or revenue receipt ?" S. NARAYANAN, V.P. (AS THIRD MEMBER) These three appeals concern asst. yrs. 1979-80, 1981-82 and 1982-83. issue involved in these appeals is common one. And that is, whether tax-in-aid payment received by assessee, film producer, from Government of Maharashtra is taxable as revenue receipt or is outside tax net as capital receipt. point of difference to be noticed here is : For asst. yr. 1979-80, ITO had accepted assessee's case that receipt in question was not revenue receipt But CIT, Pune later reopened matter under s. 263 of IT Act, 1961; and for reasons stetted by him in his order dt. 16th Aug., 1984, he set aside assessment directing ITO to bring to tax tax in-aid receipts (hereinafter referred to simply as "subsidy") referable to that assessment year in denovo assessment to be made. 2. As regards asst. yrs. 1981-82 and 1982-83, ITO himself brought to tax subsidy referable to these assessment years. In further appeal, Commissioner(A) confirmed action of ITO; and hence assessee is in appeal on question of taxability of subsidy for all three years. 3. above three appeals were heard by Bench of Tribunal on 10th Feb., 1986. learned Accountant Member who wrote leading order was of view that subsidy was rightly brought to tax by Department. learned Judicial Member disagreed, in his view, subsidy was of capital nature and could not be brought to tax as revenue receipt. President has thereupon referred following point of difference for decision by Third Member : "Whether amount received by assessee from Government of Maharashtra in terms of its resolution dt. 28th Jan., 1975 and rules made thereunder, bears character of capital receipt or revenue receipt ?" This is how matter has come up before me. 4 . Shri G.N. joglekar, learned Counsel for assessee, placed strong reliance on order of learned Judicial Member. He pointed out that assessee has been and continues to be producer of Marathi films. For films produced by him he does not act as distributor or exhibitor. He enters into separate agreement with distributor for exploitation of film and except for first positive film ("print") which he has to take out for getting certificate of exhibition from Board of Censors, assessee does not take out prints for exhibition. Shri Joglekar referred to details of Scheme under which Maharashtra Government came to grant subsidy. He also distinguished on facts decisions relied upon by learned Accountant Member to argue that conclusion recorded by learned Accountant Member was not correct. important point stressed by Shri Joglekar was that assessee produces only what is called "negative". This is ultimate producer of assessee's time, effort and money. It was to aid and supplement cost of production of this article, i.e., negative of Marathi film that above subsidy became payable to assessee. This negative always remains property of assessee. It is never sold. It is distributor who always incurs cost of making out prints from negative as stipulated in agreement between distributor and assessee. cost of taking out such prints has to be borne by distributor. assessee did not exploit prints on his now at any time. It is distributor who, with his separate arrangement with exhibitors, exploits market value of prints. In other words, Shri Joglekar's essential submission was that subsidy given to assessee was for meeting cost of acquiring capital asset and which asset having always remained property of assessee, there was no case for taxing subsidy as revenue receipt. In this regard, he emphasized that cost of production of negative had never been debited to trading account. Until picture is completed progressive expenditure is shown as work-in-progress on assets side of balance sheet. After production is complete, value of negative is shown as asset in balance sheet. In fact, he invited my attention to page 100 of paper book wherein cost of production of attention to page 100 of paper book wherein cost of production of picture "Laxmi" subsidy received by assessee towards cost of production of picture is subject of assessment and dispute in these three appeals has been shown on assets side of balance sheet at Rs. 4,34,611 as on 31st March, 1978. Shri joglekar also referred to various decisions which, in his view, supported order of learned Judicial Member. He referred in particular to decision of Bombay Bench of Tribunal in Fifth ITO vs. Sarvodaya Films (1983) 4 ITD 320 (Bom). In that case, Tribunal had noted decision in H. Mohamed & Co. vs. CIT (1977) 107 ITR 637 (Guj) wherein it was pointed out that stock-in-trade was something in which trader dealt whereas capital asset was something with which he dealt. Tribunal had held in that case that assessee there (a distributor of films) who had acquired rights of distribution of six pictures during relevant accounting year had acquired capital asset, but that this asset had very short life and that hence method of accounting followed by assessee no profit or loss was brought into accounts until collections made on films covered cost of acquisition was realistic and consistent with such short life. Tribunal went on to hold that asset held by assessee could be considered to be "plant" and hence eligible in any case for relief of balancing charge under s. 32(1)(iii) of Act. Finally, Shri Joglekar submitted that after all subsidy had behind it idea of strengthening weak financial base of Marathi film producers. If that was intention of Government, there was no point in interpreting taxing statute in such manner as to wholly defeat that object. By taxing subsidy, good portion of subsidy would be taken away, thus restoring more or less status quo ante. Surely (Shri Joglekar contends), interpretation should not proceed on such wholly inequitable and unrealistic line. 5 . Shri A. Roy, departmental representative, opposed above submissions. He placed strong reliance on order of learned Accountant Member. He also referred in particular to decisions referred to in order of learned Accountant Member in support of conclusion recorded by him According to Shri Roy, negative produced by assessee was not end product. It was intermediate product. This negative as such had no value. Nor was assessee in business of selling negatives. His business was to exploit negative throughout positive prints which were taken out on negative. It was print which came out of negative that gave assessee income. It was towards this ultimate product, viz. print which was parted with by assessee for consideration tat Maharashtra Government granted subsidy in question. In other words, subsidy was for purpose of production of stock-in-trade. Hence such subsidy could not but be revenue in nature : and had been rightly taxed. departmental representative relied, in particular, on analysis of this aspect recorded by learned Accountant Member in paragraph 13 of his order. He also referred to Special Bench decision of Tribunal in First ITO vs. Smt. Peethambari Devi (1983) 37 CTR (Trib) 45 (Mad) (SB) : (1983) 17 TTJ 418 (Mad) (SB). In that case, assessee produced feature film in respect of which she incurred loss in first year, after setting off entire cost of production. In next year, she received subsidy under scheme (framed by Government of Tamil Nadu) for having produced film within State of Tamil Nadu. She claimed that subsidy amount was capital receipt and was hence not taxable. ITO rejected this claim and ITO's action was upheld by Tribunal. Tribunal held that in order that subsidy could be treated as capital receipt, assessee had to show that subsidy was meant to meet cost of capital asset. On other hand, assessee had treated feature film as her stock-in-trade and its full cost was amortised in first year itself. So far as assessee was concerned, there was only invitation to produce film within state using available facilities and to encourage development of such facilities so as to increase production of such firms. Such encouragement did not involve any capital expenditure by assessee. Nor did assessee by reason of such invitation by State Government incur any capital expenditure or set up any infra structure. undisputed fact was that subsidy went only to reduce cost of production of feature film and it was so exhibited even in accounts of assessee. subsidy was, therefore, nothing but revenue receipt. departmental representative submitted that this decision also strongly supported Revenue's stand. 6. Before I deal with arguments, it would be necessary to set down very briefly points made by learned Members who heard appeals originally and also some other crucial facts relating to issue in dispute. learned Accountant Member's order shows following reasoning: (i) subsidy scheme makes it clear that it is meant to be incentive to film producer to continue to produce quality films. basis for grant of subsidy as well as mode of paying it make it clear that it is to enable producer to keep on producing films which are in nature of stock-in-trade. scheme is clearly for keeping producer in business and in that sense, subsidy constituted supplementary receipt of trade. See Dhrangadhra Chemical Works Ltd.'s case (supra). Court held there that where subsidies or grants are given by Government to assist trader in his business, they are, generally speaking, payments of revenue nature. They are supplementary trade receipts and not capital payments, although they might be called advances or might be subject to contingency of repayment. (ii) Even assuming that original negative remained with producer, negative is not end in itself, but starting point for production of real thing required for commercial exploitation. activity of assessee, film producer, is production of films as stock-in-trade. (iii) law relating to compensation has to be examined with care. It is applicable to cases where something is lost and it is to be seen whether what is lost creates gap in capital structure. In instant case, assessee has lost nothing for which he was compensated. What he received was incentive for producing quality films which would be stock-in-trade and hence subsidy would carry unmistakable stamp of revenue receipt. (iv) There was direct authority in favour of Department by way of Tribunal decision in Sadichha Chitra's case (supra) for asst. yr. 1976-77. There was no reason to depart from ratio of that order, that order having followed decision in V.S.S.V. Meenakshi Achi's case (supra). 7. reasoning of learned Judicial Member was briefly as under : (i) real test is to see whether ownership of asset remains with assessee. If it does, asset is capital asset. If ownership of asset passes to user, it would be stock-in-trade. See Bombay Burmah Trading Corpn. Ltd.'s case (supra). (ii) assessee received subsidy for production of negative. This negative remained his property for ever. As held in Gemini Pictures Circuit Ltd.'s case (supra) film negative is capital asset. On other hand, decision cited on behalf of Department viz., Modern Theatres Ltd.'s case (supra) dealt with positive prints and was not applicable. (iii) In case of Sadichha Chittra (supra) Tribunal had relied on decision in V.S.S.V. Meenakshi Achi's case (supra) but V.S.S.V. Meenakshi Achi's case (supra) proceeded on different facts. In that case, expenditure on maintenance of rubber estate for which subsidy was received was clearly expenditure of revenue nature and hence subsidy also would be of revenue nature. (iv) In instant case, subsidy was given to promote production of Marathi colour films. In absence of such subsidy assessee would not have been in position to produce films. assessee's case is not, therefore, one where it could be said that subsidy received from Maharashtra Government was of revenue nature. (v) assessee treated cost of film produced by him as capital asset. His balance sheet reflects this position. negative remains with producer. If negative is held to be stock-in-trade, assessee could be required to pay taxes even before he received subsidy from Marashtra Government. Under no circumstances, such occasion should arise. subsidy in question cannot, be taxed as revenue receipt. 8 . It only remains to set down following factual position before I proceed to consider submissions of parties. This position is based on statement filed before me by Shri Joglekar. There was no dispute raised on this by departmental representative. "A" PAHUNI * . . Period Cost Collection . (Rs.) (Rs.) 1-4-1975 to 31-3-1976 2,48,410 1-4-1976 to 31-3-1977 1,64,529 4,37,154 1-4-1977 to 31-3-1978 2,19,756 . 4,12,938 6,56,910 "B" Tax-in- Cost Collection LAXMI* aid . Rs. Rs. Rs. 1-4- 1977 to 31- 4,34,611 3,27,588 3-1978 1-4- 1978 to 31- 2,98,876 2,95,032 5,84,660 3-1979 1-4- 1979 to 31- 3,08,149 3-1980 6, 22 . 7,33,487 8,92,809 ,620 "C" Hich Khari . . . Daulat * 1-4- 1979 to 31- 7,32,938 3-1980 1-4- 1980 to 31- 3,88,218 3,50,000 2,59,062 3-1981 1-4- 1981 to 31- 1,00,000 2,82,400 3-1982 . 11,31,156 4,50,000 5,41,462 (*) Names of Marathi pictures produced by assessee. 9 . So far as details of scheme under which subsidy became payable, I cannot do better than to quote from learned Accountant Member's order. Both parties before me agreed that this stated position briefly and correctly: " From subsidy scheme explained to us it is clear that it is provided as incentive to film producer to continue to produce quality films. salient features of scheme, as per resolution dt. 28th Jan., 1975 and other resolutions and rules are as under. scheme has come into effect from 1st April, 1975. For purpose of scheme words "producer of Marathi film" are defined under cl. 1(2) to mean person who is shown as such on certificate granted to that film by Film Censor Board in relation to Marathi film produced and exhibited in Maharashtra, who is domiciled in State of Maharashtra for period not less than 15 years, and who has been actively connected in any capacity with production of Marathi film in Maharashtra for period not less than three years prior to date of his application under these rules, This clearly indicates that benefits of subsidy scheme are available only to those persons who are already in this line for at least three years prior to date of application. clause regarding certificate of eligibility shows that producer is eligible to get certificate of eligibility for sum of money equivalent to total amount of entertainment duty actually collected and credited to Government on exhibition of Marathi film produced by him and exhibited in State of Maharashtra, during immediately preceding financial year, lees service and collection charges, as may be prescribed from time to time. Thus before getting any subsidy or grant producer must have already produced film and it is only with reference to entertainment duty actually collected and credited to Government of that film which would be basis in granting subsidy or grant for next film produced by producer. amount of subsidy or grant varies as per cl. 4(iv). subsidy or grant is given during completion of next film of producer in four instalments and last instalment is released only after new film is censored and actually released." 10. I have considered position. essential point seems to be to decide whether negative which assessee produced is capital asset in hands of assessee or his stock-in-trade. Stock-in-trade is something which trader cannot hold on to. This is something so basic that one does not require any authority for support. Similarly put, stock-in-trade is what assessee may either manufacture himself out of raw materials brought by him or which he may stock in his godown or shop by direct buying. In both cases, stock- in-trade comes to be disposed of for consideration resulting in sales. Stock-in- trade is, therefore, as different form capital asset as chalk from cheese. accounting also is quite different. Stock-in-trade goes into trading account. stock remaining unsold at end of year is valued as closing stock and goes to balance sheet on assets side and shown separately as such. method of valuation would affect computation of book profits of business of each year e.g., cost or market price or whichever is lower and so on. capital asset, on other hand, does not obviously go into trading account. It remains in balance sheet subject to adjustment on account of depreciation or amortisation if one prefers that word if any provided for. So far as accounting part is concerned, it was common ground before me that assessee had never brought what he produced, i.e., negative, into his trading account as stock-in-trade. On contrary, it was shown as work-in-progress (in course of production) and on completion was shown was asset in balance sheet. Of course, as observed by learned Judicial Member, though this fact is relevant, it may not be conclusive one way or other. One has, therefore, to see how assessee has dealt with this asset. 11. Shri Joglekar had referred to pages 13 and 14 of Paper Book. These contain agreement dt. 16th Sept., 1977 which assessee entered into with M/s Ajay Film Distributors for distribution rights of colour film Laxmi. (The accounting year is financial year) Briefly terms and conditions of this agreement were : (a) Ajay Film Distributors acquired world rights for distribution of said film. (b) Ajay Film Distributors to advance Rs. 1,50,000 recoverable from assessee from time to time. (c) Ajay Film Distributors were entitled to take out 12 prints as and when required by them and also to carry out publicity, decoration etc., for exploitation of above film. (d) Ajay Film Distributors to be paid commission at flat rate of 25 per cent up to business of Rs. 4 lakhs and rate of 50 per cent thereafter. (Shri Joglekar pointed out that in this line of business and in such types of agreement, undisputed position was that balance after payment of aforesaid 50 per cent would be producer's share ; that in fact such share was received by assessee and was also shown in his books in set of accounts under name M/s Vishwas Chitra. Shri Joglekar further clarified that assessee is also exhibitor of Hindi and English films, but that only business of production of Marathi films was being done in name of M/s Vishwas Chitra for which separate accounts had been kept all along.) 12. There is substance in assessee's claim that asset in question, viz., negative, has been all along treated by assessee as his capital asset. He never parted with it. He entered into agreement with distributor for distribution rights, consideration being share of profit on commercial exploitation of prints taken out from negative. value of negative was never brought into trading account and had been shown in balance sheet as asset. It is on course not possible to accept departmental representative's claim that negative as such had no value. That would be obvious non sequitur to finding of learned Accountant Member that it is stock-in-trade. 13. I have also seen details of Maharashtra Government Scheme for subsidy or (as it is referred to in Scheme), tax-in-aid grant. This is available at pages 72 to 78 of Paper Book. (Resolution No. FLM 1074-F, dt. 28th Jan., 1975 of Social Welfare, Cultural Affairs, Sports & Tourism Department, Government of Maharashtra). objectives of scheme are : (a) To promote production of better Marathi (feature) films generally, and (b) To help production of Marathi colour (feature) films in preference to black and white films. It is clarified that scheme envisages grant of assistance to producers of Marathi films in their "future ventures". There are various forms prescribed to be filled in by producer to become eligible for subsidy. Form No. 2, for example, requires cost of production to be shown, as also amount paid to distributor. Then Form No. 3 carries following standard form of application for financial assistance : "The Managing Director, Maharashtra Sanskritik Vikas Mahamandal Ltd. Bombay 400 01 Dear Sir, I/We beg to apply to Financial Assistance to enable to produce Marathi feature film. I/We hereby submit certificate obtained from collector certifying amount of entertainment duty collected and paid into Government treasury. In view of this, I/We no request Managing Director of Maharashtra Sanskritik Vikas Mahamandal to release amount equivalent to entertainment duty not exceeding Rs. 4 lakhs in case of black and white picture/and not exceeding Rs. 8 lakhs in case of coloured film to enable I/we to undertake production of new Marathi Film. required particulars are given below : Form No. 4 requires applicant to give total cost of each film and also following details : "(a) Was it success ? (b) Total receipts including grant-in-aid received, if any and net profit/loss. (1) Distributor's share. (2) Producer's share". Column 7 of same Form required following details to be given : "7. Budget details of production, distribution, and release : Mention in details estimated cost from story to point of censoring film, given expenditure under major heads such as : (a) Story (b) Music (c) Studio (d) Dance (e) Outdoor shooting (f) Cameraman (g) Artists (h) Staff (i) Recording (j) Laboratory (k) Editing (l) Insurance (m) Legal charges (n) Censor charges (o) Publicity (p) Allowance for (sic) (q) Unforeseen expenses (r)Cost of prints and its number (s) Any other details producer may like to mention." 14. It appears to me from above that what government was trying to do was to (sic) Marathi film producers into producing better Marathi films (back and white) and more Marathi colour films. Obviously, Marathi film industry suffered from lack of financial resources and Government came forward to set this right to extent possible. It was argued before me for Department that compensation paid to some damage or gap in capital structure would be of capital nature, but not otherwise; that in this case there was no damage or loss to capital structure of assessee and hence subsidy was revenue receipt. In reply, Shri Joglekar pointed out that whole trust of scheme was to shore up producer's profit-making apparatus that apparatus was obviously on shaky foundation; it needed adequate finance to be able to function on firm and confident footing, and tax-in-aid supplied necessary material for this purpose. On consideration of both points of view, I am inclined to accept latter as more in consonance with facts and law, that is, subsidy was towards strengthening producer's profit-making structure and hence could not be straightaway brought to tax as revenue receipt. 15. discussion above would show that there is no material to hold that negative represented stock-in-trade of assessee. In my view, it may not be valid to argue tha negative was intermediate (or penultimate) product of assessee's business activity. If that is so, it should disappear moment ultimate product came into view. On contrary, so-called ultimate product (positive prints) disappear or rather never appear. They are never property of assessee. It is so-called intermediate product negative, that always remains with assessee. It is difficult to avoid conclusion that negative represented clearly, in hands of assessee, capital asset." 16. I have already referred in para 11 to terms of agreement with Ajay Film Distributors. Pages 146 and 147 of assessee's Paper Book show statement of rentals for month of November, 1978 for picture Laxmi for territory of Maharashtra. Out of collection of Rs. 80,190, Rs. 29,048 is marked out as commission due to distributors and balance of Rs. 60,143 is shown as net collection. On page 157 similarly, there is copy of rentals for same picture for month of February, 1979. Out of collections of Rs. 18,511, Rs. 9,255 is shown as commission payable, balance of Rs. 9,255 being shown as net collection for producer. At page 128 of Paper Book is Profit & Loss Account for year ending 31st March, 1979. Based on above monthly gently rental statements of Ajay Film Distributors, collections for Laxmi for year ended 31st March, 1979 are shown at Rs. 5,84,660. These facts have been noticed here only to clear as to what was exploited, what was sold as stock-in-trade and what was retained as capital asset. evidence on record, as I said before, points to conclusion that negative in question which assessee produced became and remained capital asset in hands of assessee. assessee's business was not in dealing in negatives. On other hand, its business was in dealing with such negatives. With negative as income-producing asset, assessee entered into contract with distributor who took out positive prints necessary for him as dictated by his (the distributor's) business needs. For this facility which assessee provided to distributor through his asset, negative, distributor parted with share in collections from exhibition of film, as stipulated in agreement between assessee and distributor. In this setting of facts, it would not be possible to hold against assessee on ground that negative represented stock-in-trade and subsidy received went towards cost of acquisition or production of such stock-in-trade. 17. What was it that Government of Maharashtra intended to do ? Plainly, Government's intent was to encourage better Marathi films, black and white and more Marathi films in colour. It was fact of life facing Government that Marathi film industry was not in position to operate on same scale as Hindi, Tamil and Telugu film producers. It, therefore, decided that it would step in and look after at least financial side of film production, if only Marathi film producers would respond in in matter. It, therefore, announced scheme of financial aid directly related to duty paid on exhibition of films made by producers. It was kind do drawback scheme under which duty that had been paid earlier to Government flowed back to Marathi film producer who met necessary conditions. basic condition was, of course, production of film itself. It was to meet cost of production of this film (which had to be passed by Board of Censors) that subsidy scheme was inaugurated. Clearly, subsidy was meant to fill gap in capital available to film producer, starting out on venture of producing better quality Marathi film or colour films in Marathi with all attendant risks. subsidy as meant to take care of obvious weakness in profit making apparatus of Marathi film producers, namely, finance. Withdrawal of subsidy would have affected functioning of this apparatus. It would, therefore, be more in keeping with material on record to hold that subsidy in question was not of revenue nature. 1 8 . Several authorities were relied upon for both sides. It is, however, common ground before me that there is no direct authority in matter. facts were either wholly different or different in material particulars even in case relating to film producers. Take case of Gemini Pictures Circuit Ltd. (Supra). That was case of company carrying on business of producers, distributors and exhibitors of motion pictures. accounting year was calendar year 1949, asst. yr. being 1950-51. Company produced picture called Approve Sahodaragal (Tamil) Hindi version being known as Nishan at cost of Rs. 10,13,726. It was released for exhibition throughout India on 21st Oct., 1949. full cost of picture was charged to trading account, but it was valued at Rs. 4,04,925 being 40 per cent of cost of production, exhibition having been only for 72 days. (As full cost of film was treated as expense of producer in year in which it was released, its market value at close of year had to be valued as any other stock-in-trade. method of determining such market value was through amortisation of cost of production at arbitrary rates for each year of film's normal expectation of life. firm industry as well as Department had agreed that normal life of exhibition would be three years from date of release, beyond which film had no value. rate of amortisation was assumed to be 60 per cent in first year, 25 per cent in second year and 15 per cent in last year of exhibition, subject to exceptions being proved). ITO, however, did not accept valuation of film at Rs. 4,04,925 as on 31st Dec., 1949. He noted that film had been exhibited only for 72 days. He was of view that pro rata amortisation had to be applied. Accordingly he increased closing stock value to Rs. 4,87,154. question before High Court was as under : "Whether in view of uniform and consistent method adopted by assessee and accepted by ITA in previous year of valuing films at 40 per cent of cost in first year in which same was released for public exhibition, ITA are entitled to change said method and value film at cost reduced by sum calculated on time basis at rate of 60 per cent for first 12 months of public exhibition ?" Court was of view that question really turned on whether ITO was or could reasonably be satisfied that method of accounting adopted b y assessee would not disclose correct profits. There was no dispute before Court there as to whether film produced (negative) was or was not stock-in-trade. In fact, assessee there had itself shown it as stock-in-trade following Circular of Central Board of Revenue (as in then was). Hence there is not much assistance to be derived from this decision so far as issue in appeal before me is concerned. 19. As already noted, instant assessee had not debited cost of production of film Laxmi to his Profit & Loss Account. In fact, it has always been practice of assessee, as is evident from papers placed in Paper Book (pp.92 to 114) to show cost of production separately in Balance Sheet as asset and in Profit & Loss Account to claim deduction towards amortisation on analogy that it is equivalent to depreciation of capital asset. In Balance Sheet, suitable adjustment for amortisation claimed in Profit & Loss Account is made and only cost less amount claimed as amortisation is shown as asset value in Balance Sheet. This has been consistent practice of assessee and it must be noted here that Department also accepted this practice. 20. In Modern Theatres Ltd.'s case (supra), assessee-company was producer and distributors of films. For asst. yr. 1957-58 it produced and released two films from negatives of which certain number of positive also were prepared and kept ready on hand before such release. question before Court was whether sum of Rs. 3,53,863 claimed by assessee as cost o f positive prints was deductible in assessment in whole or in part independent of amortisation. Court noted that Board's Circular on amortisation of films did not apply to positive prints. positive prints would normally become useless after six months from commencement or their screening. Where accounts of assessee showed that positive prints were screened for exhibition during accounting year and Tribunal was of opinion that after 150 shows positives had not value, it had to be held that full cost of prints could be deducted in computing income of accounting year as revenue expenditure independent of rules relating to amortisation. In course of its judgment, Court observed that in hands of producer and distributor cinema film is not capital asset, that it is neither fixed capital asset nor circulating capital assets that it partakes more of character of stock-in-trade, and amortisation allowed by Circular of Board is not in nature of depreciation allowance of capital. Strong reliance was placed upon these observations by departmental representative to contend that cinema film was not capital asset. But such observations could not be taken out of their context. What Court was concerned with in Modern Theatres Ltd.'s case (supra) were positive prints. Court's observations related to assessee who was producer and distributor. That is not case here. Hence this decision is not directly applicable to facts of case before me. 2 1 . V.S.S.V. Meenakshi Achi's case (supra) is to seen next. There assessee owned rubber plantations in Federated Malay States outside Penang. Out of fund into which ceases collected under Rubber Industry (Replanting) Fund Ordinance, 1952, on rubber produced in Penang and rubber exported from Federation other than Penang, were paid, proportionate parts of ceases so collected, after defraying expenses, were credited to accounts of assessees, corresponding to amount of rubber produced by them, and payments were made to assessees from amounts so credited against expenditure incurred on maintenance of plantations. On these facts, Supreme Court held that as amounts from fund earmarked for assessees on basis of rubber produced by them were paid against expenditure incurred by them for maintaining rubber plantations and producing rubber. amounts received by assessee's were revenue receipts and, therefore, liable to be included in their assessable income. It was argued for Revenue before Court that under terms which governed payments, payments were made to assessee to enable them to recoup Revenue expenditure for running and maintaining plantations and hence payments were revenue receipts. Supreme Court found submission to be correct on facts of case and held amounts to be revenue in nature. facts and ratio of this case are easily distinguishable. In instant case, scheme formulated by Maharashtra government nowhere says that it is for meeting Revenue expendxirue that is being incurred by film producer. In fact, it was pointed out by Shri Joglekar that question of revenue expenditure did not arise at all until after film was produced. This is, of course, wide proposition and need not be debated here. But fact remains that subsidy directly related to cost of production of Marathi film producers. second point of difference was that in V.S.S.V. Meenakshi Achi's case (supra) payment also related to production of rubber which was stock-in-trade. Hence, whatever may be other reasons advanced for holding receipt in question to be revenue in instant case, it cannot be so held on authority of Meenakshi Achi. That much is clear. 22 . Sadichha Chitra's case (supra): I have gone through this order of Tribunal dt. 24th March, 1981. There also similar subsidy was received by assessee, Marathi film producer, from Government of Maharashtra. question before Tribunal was, whether it was taxable as revenue receipt. It was contended before Tribunal for assessee that financial assistance in question was received towards cost of production and, therefore, it was not revenue receipt. Circular of Central Board of Direct Taxes dt. 1st Aug., 1974 was also relied upon. Tribunal did not find Circular applicable to case before it. It dismissed assessee's claim after recording following: (i) assessee's business was that of producing motion pictures and selling their distribution rights. (ii) V.S.S.V. Meenakshi Achi's case (supra) was applicable here. learned counsel for assessee was not able to show why that decision should not be applied here. 2 3 . I have already tried to analyse decision in V.S.S.V. Meenakshi Achi's case (supra) and have also recorded my view that said decision having been rendered in quite different factual context, was not applicable here. Secondly, difference of opinion having been formulated and referred to Third Member, it would not be permissible in law at this stage to simply say that earlier order of Division Bench has to be followed or if not issue should be referred to larger Bench. time for all that is long past. 24. Of decisions referred to by learned Judicial Member, one may notice decision in Mahindra & Mahindra Ltd.'s case (supra). It was held there that profit realised by assessee, which was Indian company on sale of its investments in American project for manufacture of diesel engines was in nature of surplus arising out of liquidation of investments and hence was capital receipt. facts of this case are quite different. This decision is of no direct assistance in dispute before me. 25. Bombay Burmah Trading Corporation Ltd.'s case (supra) : In this case, assessee company took contracts of forest leases (teak) from Government of Burmah from 1862. In year of account ending on 31st May, 1950, assessee had about 15 forest leases having been granted in 1955 for 15 years each. Under these leases, assessee could fell teak trees convert them into logs, remove them after payment of royalty to Government, for its own purpose. Because of Second World War, then Government of Burma extended lease period until such time as it became possible to resume forest operations. In 1948-49, then Government of Burma nationalised forest and leases were terminated. In pursuance of agreement dt. 10th June, 1949, assessee made over to Government of Burma various assets pertaining to leases, viz., headquarters, elephants, cattle, stores, buildings etc and Government of Burma delivered in all 43,860 tons to assessee-company towards (a) non-duty paid logs, handed over to Government (b) against depreciable asset : and (c) against livestock like elephants, etc. These logs were sold off by assessee in accounting years between 1949 and 1952. question before Court was whether sale proceeds against non-duty paid logs and of logs delivered against handing over of depreciable assets, stores and livestock were taxable or were exempt as being in nature of capital receipts. 26. Court observed that fixed capital is what owner turns to profit by keeping it in his own possession circulating capital is what he makes profit of by parting with it and letting it change masters, circulating capital is capital which is turned over and in process of being turned over, yields profit or loss. determining factor was nature of trade in which asset was employed. Compensation received for immobilisation, sterilisation, destruction or loss, total or particle, of capital asset would be capital receipt. Where compensation is recovered for injury inflicted on man's trading, so to speak, hole in his profit, compensation would go to fill hole and would be trading receipt. On other hand, where injury is inflicted on capital assets of trade, making, so to speak, hole in them, compensation recovered is meant to be used to fill that hole and is capital receipt. If sum represents profits in new form, then that is income. But where agreement (under which sum became receivable) relates to structure of assessee's profit-making apparatus and affects conduct of business, money received for cancellation or variation of such agreement would be receipt. 27. As would be evident, facts of above case of not offer close 27. As would be evident, facts of above case of not offer close parallel. All same exposition above does help in bringing real nature of issue involved here into sharper focus. It can be said that assessee, not having parted with negative and negative remaining property of assessee, cost of production of that article represented capital expenditure i.e., expenditure incurred of acquiring capital asset. subsidy that went towards that cost which cost assessee otherwise might not have been able to meet, i.e., hold in capital structure would, therefore, be capital in nature and hence not assessable as income. 28. In result, I would agree with conclusion recorded by learned Judicial Member to effect tha amounts received by assessee from Government of Maharashtra (in terms of Resolution dt. 28th Jan., 1975 and rules made thereunder) were in nature of capital receipts and hence not assessable to income for asst. yrs. 1979-80, 1981-82 and 1982-83. 29. matter will now go back to Bench which originally heard appeals, for disposal in accordance with law. *** V.N. SARPOTDAR v. INCOME TAX OFFICER