Film stock valuation and profit computation must reflect real earning patterns, not rigid mechanical accounting formulas.

The commentary explains that a regular accounting method for valuing film stock may be rejected under the proviso to section 13 of the Income-tax Act if it does not disclose true profits. It notes that an assessment method must reflect the film's actual earning pattern, including the period of exhibition and relevant collections, rather than applying a rigid accounting or time-based formula. It also states that any substitute method adopted by the revenue must reasonably approximate real profits and cannot ignore material earning data by using an inflexible mechanical rule.

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Issues: Whether the assessee's regular method of valuing film stock and allowing amortisation at 40 per cent. of cost in the first accounting year could be rejected under section 13 of the Income-tax Act, and whether the mechanical time-basis method adopted by the revenue correctly reflected the true profits.

Analysis: The regular method followed by the assessee treated the accounting year as the relevant unit for applying the standard film-depreciation percentages, but it ignored the actual period of exhibition during the year and could produce distorted results. On that footing, the method did not properly disclose the true profits and was liable to be rejected under the proviso to section 13. At the same time, the revenue's unqualified time-basis formula was also unsatisfactory because it treated depreciation as uniform throughout the year and ignored the actual collections from the film, although those receipts were a relevant factor in estimating the diminishing earning capacity of the film. The proper approach required a computation that took account of the film's real earning pattern and not a rigid mechanical rule.

Conclusion: The assessee's valuation method was not sustainable, but the revenue's time-basis computation was also incorrect; the assessment had to be revised on a more realistic basis reflecting the true profits.

Final Conclusion: The reference succeeded only in part, with both the assessee's method and the departmental method being disapproved, and the writ petition becoming unnecessary and being dismissed.

Ratio Decidendi: Where the regular method of accounting does not disclose true profits, it may be rejected under the proviso to section 13, but any substituted method must itself be one that reasonably approximates the real profits and cannot rest on an inflexible mechanical formula that ignores material earning data.

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