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TMI Blog1984 (11) TMI 104X X X X Extracts X X X X X X X X Extracts X X X X ..... h, the ITO observed as under : " The 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 a copy of account as appearing in the books of the assessee pertaining to Rajshree Pictures Pvt. Ltd. As per the account filed, a sum of Rs. 1,75,000 was receivable from Rajshree Pictures Pvt. Ltd. as on 31-3-1976. During the accounting year relevant to the assessment year 1979-80, the assessee has written off Rs. 1 lakh and has carried over Rs. 75,000 as amount receivable to the subsequent year's account. Rs. 1 lakh was claimed as loss in the profit and loss account. This loss claimed by the assessee is not accepted, as the same is not supported by any evidence. The assessee has not filed any certificate of Rajshree Pictures Pvt. Ltd. and it is not clear as to what is the nature of the money advanced and it is also not clear why Rs. 1 lakh is written off." 4. Shri Jivraj pointed out that at the draft assessment stage, the ITO had proposed to make the assessment in the status of an unregistered firm on an income of Rs. 1,90,679, disallowing a loss of Rs. 1 lakh referred to above. Shri Jivraj pointed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1,63,169 being 25 per cent of the amount of Rs. 6,52,426.75). We find that Shri Jivraj is correct. He then brought to our notice the assessee's letter to the IAC dated 6-9-1982, wherein the 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 an amount of Rs. 1,75,000, we were entitled to a refund of Rs. 11,893.31. These facts are verified from attached sheet submitted to us by Rajshree Pictures (P.) Ltd. From the above, it can be seen that the 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 the Income-tax Rules, we should be allowed losses incurred 90 days before this picture was released. We have made the claim in our profit and loss account. However, the same was not allowed by the ITO." On these facts, stated Shri Jivraj, in terms of his directions dated 10-9-1982, the IAC noted the fact that the assessee had filed with the ITO and himself a xerox copy of statement and the fact that in the subsequent accounting year, the assessee had received a sum of Rs. 75,000 from Rajshree Pictures (P.) Ltd. On that basis, the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is entitled to claim deduction. 9. Shri Vohra for the revenue accepted the fact that by the payment of Rs. 1,75,000, the assessee had obtained certain trading rights. However, according to Shri Vohra, since the assessee had the right to recover the dues from Rajshree Pictures (P.) Ltd. for a period of 10 years, the write off of Rs. 1 lakh in the accounting year ended 31-3-1979 was merely anticipated loss and it is urged that the anticipated loss cannot be allowed. Loss suffered by the assessee, states Shri Vohra, can be considered only in the last year of the agreement period and in that year only, the loss, if any, will be allowable. Shri Vohra had nothing special to bring to our notice concerning the assessment for the year 1980-81. 10. It may be added that during the course of hearing, we brought to the notice of Shri Vohra our decision in the 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 the case of Smt. Sadhana Nayyar. 11. Having heard the parties and examined the record, we find that unfortunately concerning the transactions of the type now under consideration, there ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt of such an agreement, the financiers do not become a distributor or a person financing producer does not become a producer so that in the case of financier neither rule 9A nor rule 9B is applicable. So far as the financier of the type of the present assessee is concerned, the financier obtains certain trading rights when he provides finance either to the producer or to the distributor. On the financier's paying, as in the present case, a sum of Rs. 1,75,000 the financier gets a right to share the commission and the overflow. On the basis of the trade practice, on which we find there has been no dispute as Shri Vohra has accepted that in the last year of the agreement if the assessee is unable to recover the advance of Rs. 1,75,000 the amount not so recovered could be the permissible deduction. Shri Vohra has rightly accepted that by payment of Rs. 1,75,000, the assessee has obtained certain trading rights. Now, we find that on paying this amount of Rs. 1,75,000, it does not mean that the assessee had purchased any capital asset. Truly, all that has happened is that the assessee has obtained a circulating capital, i.e., certain trading rights in lieu of cash. 13. As we have st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issible deduction either under section 10(2)(xi) or section 10(2)(xv) of the Indian Income-tax Act, 1922 (' the 1922 Act '). On the assessee's appeal being allowed, at the instance of the Commissioner, the following question was referred for the Court's opinion : " Whether there are materials for the Tribunal to hold that the sum of Rs, 2.87,422 aforesaid represents a loss of capital ?" The High Court decided this issue against the revenue and on the question referred to above, the department filed an appeal to the Supreme Court. After considering various cases, the Supreme Court observed as under : " These cases illustrate the distinction between an expenditure by way of investment and an expenditure in the course of business, which we have described as current expenditure. The first may truly be regarded as on the capital side but not the second. Applying this test to this simple case, it is quite obvious which it is. The amount was an advance against price of one crop. The Oppigedars were to get the assistance not as an investment by the assessee-company in its agriculture, but only as an advance payment of price ...." 16. The second case, which one recollects, is agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. Considering the facts on record, we find that as at the end of the year 31-3-1979, the 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, the value put is lower than the cost, one cannot say that such a person is claiming any anticipatory loss. We find that the authorities below have misunderstood the transaction. We find that according to the authorities below, the transaction of the type now under consideration is something out of the ordinary. We do not find any basis for upholding the decision of the lower authorities that the assessee is not entitled to evaluate its trading rights. Considering the discussion on the issue in Smt. Sadhana Nayyar's case and in similar other cases, we find that the assessee was justified in evaluating its trading rights. 18. As we have found earlier, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods. If it is more or less than the cost, then the effect is to state the profit on the goods which actually have been sold at the incorrect figure .... From this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, if that value is less than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year's results a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in question' . . . . While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the 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 the opinion, that neither of the authorities below has considered the exact mode of the evaluation. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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