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TMI Blog1973 (8) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... smuggling during the assessment year 1958-59 ? " - There is no other material to show that the assessee was involved in currency smuggling activities and derived income which he had suppressed. In the special facts and circumstances of this case, we are clearly of the view that the penalty levied cannot at all be sustained X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income-tax Officer of the extent of that business and the alleged profits derived by the assessee was quite arbitrary and excessive ; and (3) that the disallowance of his claim of Rs. 17,630 as trading loss was not justified. However, these contentions were negatived by the Appellate Assistant Commissioner who held that the evidence on record was sufficient to lead to the inference that the assessee must have had currency smuggling activities and that though the estimate of the income from this source at Rs. 30,000 made by the Income-tax Officer was justified, as additions have been made also on the basis of explained cash credits, the addition towards " currency smuggling " should be restricted to Rs. 25,000. The Appellate Assistant Commissioner also upheld the disallowance of the assessee's claim for loss of Rs. 17,630. There was a further appeal to the Income-tax Appellate. Tribunal reiterating the same contentions as were urged before the Appellate Assistant Commissioner. The Tribunal took the view that the admission made by the assessee in his letter dated October 25, 1959, was sufficient to prove that the assessee had indulged in currency smuggling activities during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrency smuggling activities and that, in any event, the estimate of the extent of the business and the profit derived therefrom was highly arbitrary and excessive. As records the third item the assessee contended that the Income-tax Officer was not justified in adding the said amount on the basis that it represented interest on credits which has been treated as his own money. But these contentions were rejected by the Inspecting Assistant Commissioner and he levied a penalty of Rs. 10,000 under section 271(1)(c) of the Income-tax Act for concealing the said three items of income. On appeal the Appellate Tribunal held that the penalty is clearly leviable in respect of the additions covered by items Nos. 1 and 3 above. The Tribunal said that the assessee having agreed that the amount referred to under item No. 1 can be included in his income, it should be taken that he deliberately furnished inaccurate particulars of his income. As regards item No. 3 the Tribunal said that the assessee has agreed to the addition of the cash credits amounting to Rs. 33,000 as well as to the disallowance of the interest thereon and that, therefore, it should be taken that the claim for interest was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gination is required to sustain the estimate made by the Income-tax Officer in this regard and that the sum of Rs. 1,500 admitted by the assessee as income has not been calculated at the rate of half a per cent. as assumed by the Income-tax Officer in the place of ten per cent. which is considered to be reasonable. But, a perusal of the letter in question shows that the sum of Rs. 1,500 which he undertook to treat as his income from this source is based on the fact that the commission chargeable by persons dealing in such activities is from 1/4% to one per cent. The Income-tax Officer finds that it is quite normal for the persons engaged in such activities to charge 10 per cent. We cannot, therefore, say that the Income-tax Officer is not justified in estimating the income from the currency smuggling activities taking into account the current rate of commission in relation to these activities. The assessee having expressed his willingness for being assessed on a sum of Rs. 1,500 as income from the currency smuggling activities, the Income-tax Officer is entitled either to accept the said figure or make an estimate of such income on some rational basis. In this case, we are not in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the merits of each case. In Commissioner of Income-tax v. Modern Theatres Ltd. Jagadisan and Srinivasan JJ. expressed the view that in the hands of a producer and distributor a cinema film is neither a fixed capital asset nor a circulating capital asset and that it partakes more of the character of stock-in-trade and that the amortization allowed by the circular of the Central Board of Revenue is not in the nature of depreciation allowance of capital. In Commissioner of Income-tax v. Mogul Line Ltd., the Bombay High Court had expressed the view that the matter of taxability cannot be decided on the basis of the entries which the assessee may choose to make in his accounts but that has to be decided in accordance with the provisions of law and that even if an assessee had shown a particular item as a profit or loss in his accounts, it has to be seen whether the said item can be regarded either as a profit or loss under the provisions of the Income-tax Act to determine its taxability. In Commissioners of Inland Revenue v. Scottish Automobile and General Insurance Co. Ltd., it has been pointed out that : "The way in which a particular trader keeps his books does not determine, or h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee was not a loss of capital but a revenue loss as it was in respect of and incidental to the business which was carried on by the assessee in the relevant accounting year. The test laid down by the Supreme Court to be applied in such cases is this : "To find out whether an expenditure is on the capital account or on revenue account, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss of capital. But it is not true of all losses because losses in the running of the business cannot be said to be of capital." The revenue would, however, contend per contra that the loss in the exploitation of the film will be a trading loss in the hands of the firm, that it will be a capital loss so far as the assessee is concerned and the way in which the assessee has shown the amount of Rs. 20,000 as an investment in the firm strongly supports the inference of the Tribunal that it is a capital loss. According to the revenue the stock valuation cases in Gemini Pictures Circuit Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Modern Theatres Ltd. are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lections up to 30th June, 1961 came to Rs. 21,110 which left a balance of Rs. 10,457 as a bad debt. The Income- tax Officer rejected the claim, but the Appellate Assistant Commissioner allowed the same. The Tribunal held that the assessee was entitled to the claim made as he has shown that Rs. 10,457 became irrecoverable in the year of account and that it was a business loss. When the matter came to this court, this court held that the sum of Rs. 10,457 cannot be treated as a revenue loss for the said amount was paid for the purpose of ensuring the contract which is the very source of the assessee's business, that the advance is de hors the distribution agreement that the return of the money is not dependent on the performance or non-performance of the agreement, that the advance is some sort of a temporary investment necessary for keeping a business of distribution and, that, therefore, it was in the nature of an investment of capital and the loss suffered by the assessee is, therefore, a capital loss. The court has said: " In order to entitled to be a deduction on the ground of business loss, the loss should not only have been incurred in the course of the business but it should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pends not on any concrete material showing that the assessee has made a false claim for deduction of interest but on the fact that the Income-tax Officer has not accepted the explanation given by the assessee as regard the credits found in the account. Even the item relating to income from currency smuggling, it is seen that the assessment is based only on the assessee's willingness to be assessed on a sum of Rs. 1,500. Though the assessee's willingness was to have a sum of Rs. 1,500 assessed as income from that source with a view to buy peace with the department, the Income-tax Officer proceeded to make an estimate on the basis of the letter of the assessee dated October 25, 1959. Though we have sustained the estimate made by the Income-tax Officer on the basis of the letter given by the assessee, we cannot take the letter as the basis for the levy of penalty, for the letter nowhere contains an admission on the part of the assessee that he indulged in currency smuggling activities. There is no other material to show that the assessee was involved in currency smuggling activities and derived income which he had suppressed. In the special facts and circumstances of this case, we are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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