1984 (11) TMI 104 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of business loss of Rs. 1 lakh claimed by the assessee.
2. Evaluation of trading rights and the applicability of Rule 9B of the Income-tax Rules, 1962.
3. Justification of the write-off of Rs. 1 lakh as an anticipated loss.

Analysis:

1. Disallowance of Business Loss of Rs. 1 Lakh Claimed by the Assessee:

The primary issue in this appeal is the disallowance of the business loss of Rs. 1 lakh claimed by the assessee. The assessee, a registered firm, had filed a return for the assessment year 1979-80, disclosing an income of Rs. 90,040. During the year, the assessee debited Rs. 1 lakh to the profit and loss account as a loss related to the film "Azad." The Income Tax Officer (ITO) disallowed this claim, stating that the loss was not supported by any evidence, and there was no clarity on the nature of the money advanced or the reason for the write-off.

2. Evaluation of Trading Rights and the Applicability of Rule 9B:

The assessee argued that Rule 9B of the Income-tax Rules, 1962, applied to their case, allowing them to claim the deduction. However, the tribunal found that the assessee was not a distributor but a financier. The agreement between the assessee and Rajshree Pictures (P.) Ltd. indicated that the assessee had advanced Rs. 1,75,000 in return for 25% of the distribution commission and overflow for ten years. The tribunal noted that the financier does not become a distributor or producer, and hence, neither Rule 9A nor Rule 9B applies to the financier. The financier obtains certain trading rights in lieu of cash, which are considered circulating capital.

3. Justification of the Write-off of Rs. 1 Lakh as an Anticipated Loss:

The tribunal examined whether the assessee was justified in evaluating its trading rights and writing off Rs. 1 lakh as an anticipated loss. The assessee argued that the evaluation of trading rights was necessary to reflect the true value of their circulating capital. The tribunal referred to the Supreme Court's decisions in CIT v. Mysore Sugar Co. Ltd. and A. V. Thomas & Co. Ltd. v. CIT to distinguish between capital expenditure and current expenditure. The tribunal found that the assessee was acquiring trading rights, not a capital asset, and the write-off was an evaluation of these rights. The tribunal disagreed with the revenue's argument that the write-off was merely an anticipated loss, stating that evaluating circulating capital, like stock-in-trade, is a standard practice.

The tribunal concluded that the authorities below misunderstood the transaction and the assessee was justified in evaluating its trading rights. However, the tribunal also noted that the assessee failed to substantiate the basis of the valuation of its rights at Rs. 75,000 as of 31-3-1979. Consequently, the tribunal set aside the orders of the authorities below and restored the matter to the ITO for redecision, ensuring a consistent and congruent assessment.

Conclusion:

The appeal was partly allowed, with the matter being remanded to the ITO for redecision in accordance with the law. The tribunal emphasized the need for a consistent approach in evaluating the trading rights and the proper substantiation of the valuation basis.