Draft assessment objections do not waive appeal rights, and genuine film production payments may qualify as allowable cost

Failure to file objections to a draft assessment order under section 144B did not, on this analysis, extinguish the statutory right of appeal under section 246, because the draft procedure was treated as a procedural safeguard and not an implied waiver of appellate rights. A genuine post-retirement payment to a retired partner for services connected with film completion and censor clearance was treated as part of the cost of production, so amortisation was allowable. On those facts, section 40(b) did not apply because the payment was not regarded as partner remuneration.

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Issues: (i) Whether an assessee who does not file objections to a draft assessment order under section 144B loses the right to maintain an appeal against the assessment under section 246. (ii) Whether the amount of Rs. 10 lakhs payable to a retired partner for services rendered in relation to the film was includible in the cost of production so as to justify amortisation, and whether section 40(b) applied to the disallowance made by the Income-tax Officer.

Issue (i): Whether an assessee who does not file objections to a draft assessment order under section 144B loses the right to maintain an appeal against the assessment under section 246.

Analysis: The scheme of section 144B was held to be procedural and intended to provide an additional safeguard before completion of assessment. The absence of objections to the draft order was not treated as a positive acceptance of the proposed variation, unlike an express acceptance under section 144B(3). A statutory right of appeal under section 246 could not be curtailed except by express provision or necessary implication, and none was found in section 144B.

Conclusion: The appeal before the first appellate authority was maintainable, and the assessee did not forfeit the right to challenge the assessment by not filing objections to the draft order.

Issue (ii): Whether the amount of Rs. 10 lakhs payable to a retired partner for services rendered in relation to the film was includible in the cost of production so as to justify amortisation, and whether section 40(b) applied to the disallowance made by the Income-tax Officer.

Analysis: The agreement for payment to the retired partner was accepted as genuine and was found to relate to services rendered after retirement in connection with securing censor clearance and completing necessary modifications. On the facts, the payment was held reasonable and connected with the cost of the film. The liability formed part of the cost of production, and the subsequent amortisation was therefore allowable. Since the payment was not treated as remuneration to a partner, section 40(b) was found inapplicable. The mercantile system objection also failed because the dispute concerned cost of the film, not a year-wise revenue deduction.

Conclusion: The addition/disallowance was unsustainable, section 40(b) did not apply, and the assessee was entitled to succeed on the merits.

Final Conclusion: The assessment challenge succeeded on both the procedural and substantive issues, and the Revenue's appeal failed in entirety.

Ratio Decidendi: A procedural safeguard in assessment does not extinguish the statutory right of appeal unless the statute expressly so provides, and a genuine post-retirement payment forming part of the film's production cost cannot be disallowed under section 40(b) as partner remuneration.

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