ASSOCIATED ENTERPRISES. v. INCOME TAX OFFICER
[Citation -1984-LL-1130-2]

Citation 1984-LL-1130-2
Appellant Name ASSOCIATED ENTERPRISES.
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 30/11/1984
Assessment Year 1979-80
Judgment View Judgment
Keyword Tags business expenditure • circulating capital • unregistered firm • state government • draft assessment • private company • trading account • advance payment • short recovery • business loss • capital asset • closing stock • doubtful debt • market value • actual cost • actual sale • written off • cost price • sale price • ex gratia • bad debt
Bot Summary: Shri Jivraj for the assessee pointed out that for the assessment year 1979-80, previous year ending 31-3-1977 on 31-7-1979, the assessee filed a return disclosing income of Rs. 90,040. In consideration of the assessee having agreed to advance a sum of Rs. 1,75,000, Rajshree Pictures Ltd. agreed to pay to the assessee 25 per cent of the distribution commission initially as well as the overflow earned b y them on the aforesaid picture in U.P. and Delhi territory for a period of 10 years from the date of release of the picture, 10 years being the period for which Rajshree Pictures Ltd. had obtained distribution rights from the producers, Pramod Films. According to Shri Jivraj, rule 9B of the Income-tax Rules, 1962, applies in the assessee's case and as such the assessee is entitled to claim deduction. We do not find merit in Shri Jivraj's submission that the assessee is a distributor and as such, rule 9B applies in the assessee's own case. On the assessee's paying Rs. 1,75,000, the assessee obtained certain rights as evidenced by the agreement dated 11-4-1975. According to Shri Vohra, since the assessee has a right to share the commission and the overflow for a period of 10 years, the write off by the assessee of Rs. 1 lakh on his evaluating the rights under the agreement dated 11-4-1975 was merely an anticipated loss and there was no provision for allowance of such an anticipated loss. Unless the assessee as a financier is permitted to evaluate its trading rights, the assessee would be taxed on an income disregarding the anticipatory loss.


This is appeal by registered firm against order of Commissioner (Appeals), dated 17-12-1982, in 1979-80 income-tax assessment proceedings. 2. only ground of appeal relates to Commissioner (Appeals)'s action in not allowing business loss of Rs. 1 lakh, as claimed by assessee. 3. Shri Jivraj for assessee pointed out that for assessment year 1979-80, previous year ending 31-3-1977 on 31-7-1979, assessee filed return disclosing income of Rs. 90,040. As observed by ITO, assessee's business is described, stated Shri Jivraj, in following words: " assessee is receiving commission income from various parties, to whom funds are advanced for making pictures." During year of account, assessee debited to profit and loss account sum of Rs. 1 lakh. Examining claim for assessee's deduction of this amount of Rs. 1 lakh, ITO observed as under: " assessee was also asked to file details of loss of Rs. 1 lakh on account of ' Azad ' picture. Shri Somaiya attended on 5-3-1982 and has filed copy of account as appearing in books of assessee pertaining to Rajshree Pictures Pvt. Ltd. As per account filed, sum of Rs. 1,75,000 was receivable from Rajshree Pictures Pvt. Ltd. as on 31-3-1976. During accounting year relevant to assessment year 1979-80, assessee has written off Rs. 1 lakh and has carried over Rs. 75,000 as amount receivable to subsequent year's account. Rs. 1 lakh was claimed as loss in profit and loss account. This loss claimed by assessee is not accepted, as same is not supported by any evidence. assessee has not filed any certificate of Rajshree Pictures Pvt. Ltd. and it is not clear as to what is nature of money advanced and it is also not clear why Rs. 1 lakh is written off." 4. Shri Jivraj pointed out that at draft assessment stage, ITO had proposed to make assessment in status of unregistered firm on income of Rs. 1,90,679, disallowing loss of Rs. 1 lakh referred to above. Shri Jivraj pointed out that under proceedings in section 144B of Income-tax Act, 1961 (' Act '), among others, assessee addressed three letters, first one dated 10-9-1982 to ITO and others dated 6-9-1982 and 15-7-1982 to IAC. On basis of facts stated in these three letters, Shri Jivraj states that assessee entered into agreement with Rajshree Pictures (P.) Ltd., whom that company had taken for distribution for Delhi and U.P. territory. It was pointed out that on 11-4-1975, assessee entered into agreement with Rajshree Pictures (P.) Ltd., as evidenced by Rajshree Pictures' letter of date addressed to assessee and countersigned by assessee. In terms of agreement, Shri Jivraj pointed out that assessee agreed to advance to Rajshree Pictures (P.) Ltd. sum of Rs. 1,75,000 for fulfilment of agreement dated 18-1-1974 between ourselves and Pramod Films, for distribution of picture ' Azad ' for territory of Delhi/U.P. circuit. This amount was to be paid in certain agreed manner Rs. 1 lakh on signing agreement and Rs. 12,500 each on tenth of every month beginning from May to October 1975. In consideration of assessee having agreed to advance sum of Rs. 1,75,000, Rajshree Pictures (P.) Ltd. agreed to pay to assessee 25 per cent of distribution commission initially as well as overflow earned b y them on aforesaid picture in U.P. and Delhi territory for period of 10 years from date of release of picture, 10 years being period for which Rajshree Pictures (P.) Ltd. had obtained distribution rights from producers, Pramod Films. Shri Jivraj pointed out that rest of terms of agreement with Rajshree Pictures (P.) Ltd. were terms that were usual in trade at relevant point of time. Shri Jivraj pointed out that in terms of assessee's letter dated 15-7-1982 addressed to IAC, it was pointed out that they had enclosed: " papers received from Rajshri Pictures (P.) Ltd., who has worked out that as on 31-1-1978 total net business done amounted to Rs. 20,30,039.80 and i n view of situation, total deficit was worked out at Rs. 6,52,426.75. Our share being 25 per cent was worked out at Rs. 11,893.31." (Shri Jivraj pointed out that Rs. 11,893.31 was typographical mistake in assessee's letter to IAC, correct amount being Rs. 1,63,169 being 25 per cent of amount of Rs. 6,52,426.75). We find that Shri Jivraj is correct. He per cent of amount of Rs. 6,52,426.75). We find that Shri Jivraj is correct. He then brought to our notice assessee's letter to IAC dated 6-9-1982, wherein assessee has stated among others that: " our share being 25 per cent worked out as Rs. 1,63,106.69 and as we have financed amount of Rs. 1,75,000, we were entitled to refund of Rs. 11,893.31. These facts are verified from attached sheet submitted to us by Rajshree Pictures (P.) Ltd. From above, it can be seen that picture in question was already released before 31-12-1978. Our accounts are ending on 31-3-1979 and, therefore, as per rule 9B(2) of Income-tax Rules, we should be allowed losses incurred 90 days before this picture was released. We have made claim in our profit and loss account. However, same was not allowed by ITO." On these facts, stated Shri Jivraj, in terms of his directions dated 10-9- 1982, IAC noted fact that assessee had filed with ITO and himself xerox copy of statement and fact that in subsequent accounting year, assessee had received sum of Rs. 75,000 from Rajshree Pictures (P.) Ltd. On that basis, IAC considered it proper to uphold ITO's action in disallowing claim of Rs. 1 lakh. As regards status, IAC did not give any direction, but as seen from final order dated 13-9-1982, ITO made assessment on assessee in status of unregistered firm on total income of Rs. 1,90,670. 5. Shri Jivraj submitted that on appeal, Commissioner (Appeals) recorded that: " copy of appellant account in books of Rajshree Pictures Pvt. Ltd. showed that no loss had been debited to appellant's account as on 31st March 1979; that there was no supporting entry either in appellant's b o o k s of account or that of Rajshree Pictures Pvt. Ltd. and that in subsequent year, assessee had received sum of Rs. 75,000 from Rajshree Pictures Pvt. Ltd. On this reasoning, IAC disallowed appellant's claim to loss of Rs. 1 lakh." 6. Shri Jivraj then pointed out that according to Commissioner (Appeals), agreement under consideration merely referred to advance of Rs. 1,75,000 and that under agreement, there is no stipulation regarding appellant's sharing loss in event of non-realisation or inadequate realisation from picture ' Azad '. On these facts, according to Commissioner (Appeals), assessee had not incurred any loss. As such, Commissioner (Appeals) confirmed disallowance of Rs. 1 lakh. 7. After bringing to our notice facts, as brought on record earlier and as evidenced by orders of authorities below, Shri Jivraj brought to our notice copy of accounts of Rajshree Pictures (P.) Ltd. as appearing in assessee's books of account from accounting year 1976-77 onwards. It was pointed out that in accounting year 1979-80, assessee received sum of Rs. 1,25,000 of which assessee transferred Rs. 50,000 to profit and loss account, so that debit of account stood at sum of Rs. 75,000. Shri Jivraj then brought to our notice assessment as made for year 1980-81, wherein ITO has brought to charge full amount of Rs. 50,000 without taking into consideration adjustment made of Rs. 1 lakh in assessee's accounting year ended 31-3-1979 relevant for assessment year 1979-80. 8. According to Shri Jivraj, rule 9B of Income-tax Rules, 1962 (' Rules '), applies in assessee's case and as such assessee is entitled to claim deduction. 9. Shri Vohra for revenue accepted fact that by payment of Rs. 1,75,000, assessee had obtained certain trading rights. However, according to Shri Vohra, since assessee had right to recover dues from Rajshree Pictures (P.) Ltd. for period of 10 years, write off of Rs. 1 lakh in accounting year ended 31-3-1979 was merely anticipated loss and it is urged that anticipated loss cannot be allowed. Loss suffered by assessee, states Shri Vohra, can be considered only in last year of agreement period and in that year only, loss, if any, will be allowable. Shri Vohra had nothing special to bring to our notice concerning assessment for year 1980-81. 10. It may be added that during course of hearing, we brought to notice of Shri Vohra our decision in case of Third ITO v. Smt. Sadhana Nayyar [1982] 8 TAXMAN 171 (Bom.-Trib.). Shri Vohra has nothing special to comment upon our order in case of Smt. Sadhana Nayyar. 11. Having heard parties and examined record, we find that unfortunately concerning transactions of type now under consideration, there has always been confusion and misunderstanding. We do not find merit in Shri Jivraj's submission that assessee is distributor and as such, rule 9B applies in assessee's own case. To repel assessee's case, nothing further is required than to refer to clause (5) of agreement dated 11-4-1975, wherein it is provided: " That it is agreed between ourselves that responsibility of realising amounts from exhibitors will be entirely ours and payment of amounts due to you out of realisations and towards commission shall be made irrespective of whether we actually receive said realisations from exhibitors or not." Based on our order in Smt. Sadhana Nayyar's case and fact stated therein, reference has been made to Board's Circular No. 30 of 1941 [C. N o . 31(3)-IT/42] we find that for number of years past, there has been confusion regarding real nature of rights of parties involved in transactions of type now under consideration. 1 2. Based on number of appeals on similar issue that have come up in appeal, we find that in film trade, both producers and distributors take money from financiers on basis of agreement of type, assessee had entered into with Rajshree Pictures (P.) Ltd. dated 11-4-1975. We find that in terms of clause (2): " In consideration of your having agreed to advance to us aforesaid amount of Rs. 1,75,000 (Rupees one lakh seventy-five thousand only), we hereby agree to pay to you 25 per cent (twenty-five per cent) of distribution commission initial as well as overflow earned by us on aforesaid picture in said territory, for period of 10 (ten) years from date of release of picture in said circuit. earnings by way of commission will be considered after deducting 6 per cent (six per cent) of realisations made on picture and only after recoupment of amount of expenses incurred, cost of extra prints and any other additional amounts paid to producers." Clause (3) provides manner in which Rajshree Pictures (P.) Ltd. would repay advance of Rs. 1,25,000. Clause (3) provides that all other terms and conditions shall be usual in trade. Considering agreement and similar other agreements for financing distribution, which we had to consider in similar cases, we find that as result of such agreement, financiers do not become distributor or person financing producer does not become producer so that in case of financier neither rule 9A nor rule 9B is applicable. So far as financier of type of present assessee is concerned, financier obtains certain trading rights when he provides finance either to producer or to distributor. On financier's paying, as in present case, sum of Rs. 1,75,000 financier gets right to share commission and overflow. On basis of trade practice, on which we find there has been no dispute as Shri Vohra has accepted that in last year of agreement if assessee is unable to recover advance of Rs. 1,75,000 amount not so recovered could be permissible deduction. Shri Vohra has rightly accepted that by payment of Rs. 1,75,000, assessee has obtained certain trading rights. Now, we find that on paying this amount of Rs. 1,75,000, it does not mean that assessee had purchased any capital asset. Truly, all that has happened is that assessee has obtained circulating capital, i.e., certain trading rights in lieu of cash. 13. As we have stated earlier, assessee is financier. In course of financing business, assessee has purchased certain trading rights. issue is, whether at end of accounting year ended 31-3-1979, assessee is justified in evaluating its value. write off of Rs. 1 lakh from account of Rajshree Pictures (P.) Ltd. in accounting year under consideration was explained by Shri Jivraj as evaluation of assessee's trading rights. We find that even though in such expressed terms inference has not been brought to our notice, in effect that is what assessee has done. 14. issue now is, whether assessee is entitled to evaluate his trading rights in matter in which assessee has done. In present case, there is advance made for purchasing certain trading rights and agreement provides manner of payment of advance and repayment thereof and fund which assessee is entitled to share with Rajshree Pictures (P.) Ltd., viz., commission and overflow of picture ' Azad ' on same being distributed in Delhi and U.P. territory. We are satisfied by payment of this type, assessee has not purchased any capital asset but assessee's circulating capital has changed its form whereas earlier, prior to payment of Rs. 1,75,000, circulating capital was in cash. On assessee's paying Rs. 1,75,000, assessee obtained certain rights as evidenced by agreement dated 11-4-1975. 15. In this regard, we recollect decision of Supreme Court in CIT v. Mysore Sugar Co. Ltd. [1962] 46 ITR 649. That was case where assessee, manufacturer of sugar, used to advance seedlings, fertilizers and money to sugarcane growers under agreement by which growers agreed to sell next crop of sugarcane grown by them exclusively to assessee at current market rates and to have advances adjusted towards price of sugarcane to be delivered to company. In certain year owing to drought sugarcane growers could not grow sugarcane and advances remained unrecovered. State Government appointed committee to consider situation in district, who recommended that assessee should ex gratia forego some of its dues. Accordingly, Mysore Sugar Co. Ltd. waived its rights in respect of sum of Rs. 2,87,422. That assessee claimed this amount as permissible deduction either under section 10(2)(xi) or section 10(2)(xv) of Indian Income-tax Act, 1922 (' 1922 Act '). On assessee's appeal being allowed, at instance of Commissioner, following question was referred for Court's opinion: " Whether there are materials for Tribunal to hold that sum of Rs, 2.87,422 aforesaid represents loss of capital?" High Court decided this issue against revenue and on question referred to above, department filed appeal to Supreme Court. After considering various cases, Supreme Court observed as under: " These cases illustrate distinction between expenditure by way of investment and expenditure in course of business, which we have described as current expenditure. first may truly be regarded as on capital side but not second. Applying this test to this simple case, it is quite obvious which it is. amount was advance against price of one crop. Oppigedars were to get assistance not as investment by assessee- company in its agriculture, but only as advance payment of price ...." 16. second case, which one recollects, is again decision of Supreme Court in A. V. Thomas & Co. Ltd. v. CIT [1963] 48 ITR 67. That was case, where assessee-company had advanced certain amounts for purchase of shares in one textile mill. transaction could not materialise as project promoting textile mill failed. borrower was able to repay to that assessee only part of advance company wrote off in its accounts, i.e., unrecovered advance of sum of Rs. 4,05,072. In that case, Supreme Court held as under: ". . . . (i) that assessee-company, in making large payments, intended to acquire capital asset for itself. In any event amounts were spent in 1948 and not in year of account ending December 31, 1951. They could not, therefore, be allowed as business expenditure under section 10(2)(xv) of Income-tax Act, 1922. (ii) That as assessee-company was neither banker nor money- lender, advances paid by assessee-company to private company to purchase shares could not be said to be incidental to trading activities of assessee. debt, for purposes of section 10(2)(xi), was something more than mere advance and meant something which was related to business or resulted from it . . . ." Court found that advance by assessee-company to promoters of New Textile Mills was not advance incidental to trading activities of company but was for purpose of acquiring capital asset for itself. As such, Supreme Court upheld decision of High Court which was against assessee. 17. One has now to consider, on which side present case falls; whether it is governed by principles laid down in case of Mysore Sugar Co. Ltd. or that of A. V. Thomas & Co. Ltd.'s case. It is clear that where amount is paid in course of business and not for acquiring any capital asset, short recovery has necessarily to be considered as permissible deduction. It is unnecessary to add that in present case by paying Rs. 1,75,000, assessee was not acquiring any capital asset as we have found assessee was acquiring certain trading rights. It is essentially for that purpose, we find that Shri Vohra had rightly accepted that loss, if any, suffered by assessee in this transaction will be permissible loss. However, according to Shri Vohra, since assessee has right to share commission and overflow for period of 10 years, write off by assessee of Rs. 1 lakh on his evaluating rights under agreement dated 11-4-1975 was merely anticipated loss and there was no provision for allowance of such anticipated loss. Considering facts on record, we find that as at end of year 31-3-1979, assessee was justified in evaluating its rights. In fact, any circulating capital, just as stock- in-trade, assessee is evaluated, and if on such evaluation, value put is lower than cost, one cannot say that such person is claiming any anticipatory loss. We find that authorities below have misunderstood transaction. We find that according to authorities below, transaction of type now under consideration is something out of ordinary. We do not find any basis for upholding decision of lower authorities that assessee is not entitled to evaluate its trading rights. Considering discussion on issue in Smt. Sadhana Nayyar's case and in similar other cases, we find that assessee was justified in evaluating its trading rights. 18. As we have found earlier, assessee basically is financier under section 36(1)(vii) of 1961 Act, corresponding to section 10(2)(xi) of 1922 Act. Section 36(1)(vii) allows deduction subject to provisions of sub- section (2), amount of any debt, or part thereof, which is established to have become bad debt in previous year. words used in section 36(2), referred to by us earlier, are seen to be these Supreme Court has used in A. V. Thomas & Co. Ltd.'s case: " debt in such cases is outstanding which if recovered would have swelled profits. It is not money handed over to someone for purchasing swelled profits. It is not money handed over to someone for purchasing thing which that person has failed to return even though no purchase was made. In section debt means something more than mere advance. It means something which is related to business or results from it. To be claimable as bad or doubtful debt it must first be shown as proper debt...." 19. Under provisions of section 36(2), banker or money-lender is entitled to claim part of debt as having become bad. It is general knowledge that when banker or money-lender advances money on security and there is fall in value of security so that banker or money-lender is not hopeful of recovering entire amount, such person evaluates security and deficit is claimed either as bad debt or as trading loss. Inasmuch as by paying this amount of Rs. 1,75,000, assessee has obtained certain trading rights and definitely not capital asset. Unless assessee as financier is permitted to evaluate its trading rights, assessee would be taxed on income disregarding anticipatory loss. Considering submissions of Shri Vohra that there is no provision for allowance of anticipatory loss, one recollects decision of Supreme Court in Chainrup Sampatram v. CIT [1953] 24 ITR 481. That was case where Supreme Court was concerned with principles underlying valuation of stock-in-trade. Against that background, Court has quoted with approval part of paragraph No. 8 of Report of Committee on Financial Risks Attaching to Holding of Trading Stocks, 1919, words being: " ...., As entry for stock which appears in trading account is merely intended to cancel charge for goods purchased which have not been sold, it should necessarily represent cost of goods. If it is more or less than cost, then effect is to state profit on goods which actually have been sold at incorrect figure .... From this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., adoption of market value at date of making up accounts, if that value is less than cost. It is of course anticipation of loss that may be made on those goods in following year, and may even have effect, if prices rise again, of attributing to following year's results greater amount of profit than difference between actual sale price and actual cost price of goods in question' . . . . While anticipated loss is thus taken into account, anticipated profit in shape of appreciated value of closing stock is not brought into account, as no prudent trader would care to show increased profit before its actual realisation . . . . " We, therefore, do not find merit in Shri Vohra's submission that anticipated loss cannot be taken into account. We are of opinion, that neither of authorities below has considered exact mode of evaluation. 20. On basis of facts as brought to our notice, we find that even though according to accounts of Rajshree Pictures (P.) Ltd. in distribution of picture ' Azad ' up to 31-12-1978 there was deficit of Rs. 6,52,426.75 and assessee's share thereof at 25 per cent worked out to Rs. 1,01,169, prima facie, assessee could not be said to be justified in evaluating its rights as on 31-3-1979 at Rs. 75,000 only since by 11-4-1979, assessee had received sum of Rs. 75,000. We are of opinion that assessee has failed to substantiate basis of valuation of its rights as on 31-3-1979 at Rs. 75,000. We find that inasmuch as authorities below were of opinion that assessee was not entitled to evaluate rights, they did not consider it necessary to make proper valuation of such trading rights of assessee. Under circumstances, we consider it advisable to set aside orders of authorities below on this issue and restore matter for redecision by ITO. We need not add that department must take consistent stand. Considering manner in which assessment for year 1980-81 is made, it is apparent that present assessment is not consistent and congruent. As such, we will accept assessee's appeal partly by restoring matter for redecision by ITO in accordance with law. 21. Before we part with case, for what it is worth, we would like to observe that value of rights of assessee now under consideration cannot, in normal circumstances, be evaluated on any basis radically different from basis on which such rights are evaluated in case of producer or distributor. 22. In result, appeal is partly allowed. *** ASSOCIATED ENTERPRISES. v. INCOME TAX OFFICER
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