1. This is an appeal by a registered firm against the order of the Commissioner (Appeals), dated 17-12-1982, in the 1979-80 income-tax assessment proceedings.
2. The only ground of appeal relates to the Commissioner (Appeals)'s action in not allowing the business loss of Rs. 1 lakh, as claimed by the assessee.
3. 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. As observed by the ITO, the assessee's business is described, stated Shri Jivraj, in the following words : The assessee is receiving commission income from various parties, to whom funds are advanced for making pictures.
During the year of account, the assessee debited to the profit and loss account a sum of Rs. 1 lakh. Examining the claim for the assessee's deduction of this amount of Rs. 1 lakh, 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 out that under proceedings in Section 144B of the Income-tax Act, 1961 ('the Act'), among others, the assessee addressed three letters, first one dated 10-9-1982 to the ITO and the others dated 6-9-1982 and 15-7-1982 to the IAC. On the basis of the facts stated in these three letters, Shri Jivraj states that the assessee entered into an 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, the assessee entered into an agreement with Rajshree Pictures (P.) Ltd., as evidenced by Rajshree Pictures' letter of the date addressed to the assessee and countersigned by the assessee. In terms of the agreement, Shri Jivraj pointed out that the assessee agreed to advance to Rajshree Pictures (P.) Ltd. a sum of Rs. 1,75,000 for the fulfilment of the agreement dated 18-1-1974 between ourselves and Pramod Films, for the distribution of the picture 'Azad' for the territory of Delhi/U.P.circuit. This amount was to be paid in certain agreed manner Rs. 1 lakh on signing the agreement and Rs. 12,500 each on the tenth of every month beginning from May to October 1975. In consideration of the assessee having agreed to advance a sum of Rs. 1,75,000, Rajshree Pictures (P.) Ltd. agreed to pay to the assessee 25 per cent of the distribution commission initially as well as the overflow earned by 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 (P.) Ltd. had obtained distribution rights from the producers, Pramod Films. Shri Jivraj pointed out that the rest of the terms of the agreement with Rajshree Pictures (P.) Ltd. were the terms that were usual in the trade at the relevant point of time. Shri Jivraj pointed out that in terms of the assessee's letter dated 15-7-1982 addressed to the IAC, it was pointed out that they had enclosed : the 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 in view of the 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 a typographical mistake in the assessee's letter to the IAC, the correct amount being 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 IAC considered it proper to uphold the ITO's action in disallowing the claim of Rs. 1 lakh. As regards the status, the IAC did not give any direction, but as seen from the final order dated 13-9-1982, the ITO made an assessment on the assessee in the status of an unregistered firm on the total income of Rs. 1,90,670.
5. Shri Jivraj submitted that on appeal, the Commissioner (Appeals) recorded that : a copy of the appellant account in the books of Rajshree Pictures Pvt. Ltd. showed that no loss had been debited to the appellant's account as on the 31st March 1979 ; that there was no supporting entry either in the appellant's books of account or that of Rajshree Pictures Pvt. Ltd. and that in the subsequent year, the assessee had received a sum of Rs. 75,000 from Rajshree Pictures Pvt. Ltd. On this reasoning, the IAC disallowed the appellant's claim to loss of Rs. 1 lakh.
6. Shri Jivraj then pointed out that according to the Commissioner (Appeals), the agreement under consideration merely referred to an advance of Rs. 1,75,000 and that under the agreement, there is no stipulation regarding the appellant's sharing loss in the event of non-realisation or inadequate realisation from the picture 'Azad'. On these facts, according to the Commissioner (Appeals), the assessee had not incurred any loss. As such, the Commissioner (Appeals) confirmed the disallowance of Rs. 1 lakh.
7. After bringing to our notice the facts, as brought on record earlier and as evidenced by the orders of the authorities below, Shri Jivraj brought to our notice a copy of the accounts of Rajshree Pictures (P.) Ltd. as appearing in the assessee's books of account from the accounting year 1976-77 onwards. It was pointed out that in the accounting year 1979-80, the assessee received a sum of Rs. 1,25,000 of which the assessee transferred Rs. 50,000 to the profit and loss account, so that the debit of the account stood at a sum of Rs. 75,000.
Shri Jivraj then brought to our notice the assessment as made for the year 1980-81, wherein the ITO has brought to charge the full amount of Rs. 50,000 without taking into consideration the adjustment made of Rs. 1 lakh in the assessee's accounting year ended 31-3-1979 relevant for the assessment year 1979-80.
8. According to Shri Jivraj, Rule 9B of the Income-tax Rules, 1962 ('the Rules'), applies in the assessee's case and as such the 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. ] 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  8 Taxman 171 (Bom.-Trib.). Shri Vohra has nothing special to comment upon our order in the case of Smt. Sadhana Nayyar (supra).
11. Having heard the parties and examined the record, we find that unfortunately concerning the transactions of the type now under consideration, there has always been a confusion and misunderstanding.
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. To repel the assessee's case, nothing further is required than to refer to Clause (5) of the agreement dated 11-4-1975, wherein it is provided : That it is agreed between ourselves that the responsibility of realising the amounts from the exhibitors will be entirely ours and the payment of the amounts due to you out of the realisations and towards commission shall be made irrespective of whether we actually receive the said realisations from the exhibitors or not.
Based on our order in Smt. Sadhana Nayyar's case (supra) and the fact stated therein, a reference has been made to the Board's Circular No.30 of 1941 [C. No. 31(3)-IT/42] we find that for a number of years past, there has been a confusion regarding the real nature of the rights of the parties involved in the transactions of the type now under consideration.
12. Based on a number of appeals on a similar issue that have come up in appeal, we find that in film trade, both the producers and distributors take money from the financiers on the basis of the agreement of the type, the 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 the 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 the ' distribution commission initial as well as overflow earned by us on the aforesaid picture in the said territory, for a period of 10 (ten) years from the date of release of the picture in the said circuit. The earnings by way of commission will be considered after deducting 6 per cent (six per cent) of the realisations made on the picture and only after recoupment of the amount of expenses incurred, cost of extra prints and any other additional amounts paid to the producers.
Clause (3) provides the manner in which Rajshree Pictures (P.) Ltd. would repay the advance of Rs. 1,25,000. Clause (3) provides that all other terms and conditions shall be usual in the trade. Considering the agreement and similar other agreements for financing the distribution, which we had to consider in similar cases, we find that as a result 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 stated earlier, the assessee is a financier. In the course of the financing business, the assessee has purchased certain trading rights. The issue is, whether at the end of the accounting year ended 31-3-1979, the assessee is justified in evaluating its value. The write off of Rs. 1 lakh from the account of Rajshree Pictures (P.) Ltd. in the accounting year under consideration was explained by Shri Jivraj as the evaluation of the assessee's trading rights. We find that even though in such expressed terms the inference has not been brought to our notice, in effect that is what the assessee has done.
14. The issue now is, whether the assessee is entitled to evaluate his trading rights in the matter in which the assessee has done. In the present case, there is an advance made for purchasing certain trading rights and the agreement provides the manner of payment of the advance and repayment thereof and the fund which the assessee is entitled to share with Rajshree Pictures (P.) Ltd., viz., commission and overflow of the picture 'Azad' on the same being distributed in Delhi and U.P.territory. We are satisfied by the payment of this type, the assessee has not purchased any capital asset but the assessee's circulating capital has changed its form whereas earlier, prior to the payment of Rs. 1,75,000, the circulating capital was in cash. On the assessee's paying Rs. 1,75,000, the assessee obtained certain rights as evidenced by the agreement dated 11-4-1975.
15. In this regard, we recollect the decision of the Supreme Court in CIT v. Mysore Sugar Co. Ltd.  46 ITR 649. That was a case where the assessee, a manufacturer of sugar, used to advance seedlings, fertilizers and money to sugarcane growers under an agreement by which the growers agreed to sell the next crop of the sugarcane grown by them exclusively to the assessee at current market rates and to have the advances adjusted towards the price of the sugarcane to be delivered to the company. In a certain year owing to drought the sugarcane growers could not grow sugarcane and the advances remained unrecovered. The State Government appointed the committee to consider the situation in the district, who recommended that the assessee should ex gratia forego some of its dues. Accordingly, Mysore Sugar Co. Ltd. waived its rights in respect of a sum of Rs. 2,87,422. That assessee claimed this amount as a permissible 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.... " (p. 654) 16. The second case, which one recollects, is again the decision of the Supreme Court in A.V. Thomas & Co. Ltd. v. CIT  48 ITR 67. That was a case, where the assessee-company had advanced certain amounts for purchase of shares in one textile mill. The transaction could not materialise as the project promoting the textile mill failed. The borrower was able to repay to that assessee only a part of advance the company wrote off in its accounts, i.e., the unrecovered advance of a sum of Rs. 4,05,072. In that case, the Supreme Court held as under : ...(i) that the assessee-company, in making the large payments, intended to acquire a capital asset for itself. In any event the amounts were spent in 1948 and not in the year of account ending December 31, 1951. They could not, therefore, be allowed as business expenditure under Section 10(2)(xv) of the Income-tax Act, 1922.
(ii) That as the assessee-company was neither a banker nor a moneylender, the advances paid by the assessee-company to the private company to purchase the shares could not be said to be incidental to the trading activities of the assessee. A debt, for the purposes of Section 10(2)(xi), was something more than a mere advance and meant something which was related to the business or resulted from it....
The Court found that the advance by the assessee-company to the promoters of the New Textile Mills was not an advance incidental to the trading activities of the company but was for the purpose of acquiring a capital asset for itself. As such, the Supreme Court upheld the decision of the High Court which was against the assessee.
17. One has now to consider, on which side the present case falls ; whether it is governed by the principles laid down in the case of Mysore Sugar Co. Ltd. (supra) or that of A.V. Thomas & Co, Ltd.'s case (supra). It is clear that where the amount is paid in the course of the business and not for acquiring any capital asset, the short recovery has necessarily to be considered as a permissible deduction. It is unnecessary to add that in the present case by paying Rs. 1,75,000, the assessee was not acquiring any capital asset as we have found the 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 the assessee in this transaction will be a permissible loss. However, 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. 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 (supra) and in similar other cases, we find that the assessee was justified in evaluating its trading rights.
18. As we have found earlier, the assessee basically is a financier under Section 36(1)(vii) of the 1961 Act, corresponding to Section 10(2)(xi) of the 1922 Act. Section 36(1)(vii) allows the deduction subject to the provisions of Sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year. The words used in Section 36(2), referred to by us earlier, are seen to be these the Supreme Court has used in A.V. Thomas & Co. Ltd.'s case (supra) : A debt in such cases is an outstanding which if recovered would have swelled the profits. It is not money handed over to someone for purchasing a thing which that person has failed to return even though no purchase was made. In the section a debt means something more than a mere advance. It means something which is related to business or results from it. To be claimable as a bad or doubtful debt it must first be shown as a proper debt....
19. Under the provisions of Section 36(2), a banker or a money-lender is entitled to claim a part of the debt as having become bad. It is general knowledge that when a banker or the money-lender advances money on security and there is a fall in the value of the security so that banker or money-lender is not hopeful of recovering the entire amount, such person evaluates the security and the deficit is claimed either as bad debt or as a trading loss. Inasmuch as by paying this amount of Rs. 1,75,000, the assessee has obtained certain trading rights and definitely not a capital asset. 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. Considering the submissions of Shri Vohra that there is no provision for allowance of anticipatory loss, one recollects the decision of the Supreme Court in Chainrup Sampatram v. CIT  24 ITR 481. That was a case where the Supreme Court was concerned with the principles underlying the valuation of stock-in-trade. Against that background, the Court has quoted with an approval a part of paragraph No. 8 of the Report of the Committee on Financial Risks Attaching to the Holding of Trading Stocks, 1919, the words being : .... As the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. 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.
20. On the basis of the facts as brought to our notice, we find that even though according to the accounts of Rajshree Pictures (P.) Ltd. in the distribution of the picture 'Azad' up to 31-12-1978 there was a deficit of Rs. 6,52,426.75 and the assessee's share thereof at 25 per cent worked out to Rs. 1,01,169, prima facie, the 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, the assessee had received a sum of Rs. 75,000. We are of the opinion that the assessee has failed to substantiate the basis of valuation of its rights as on 31-3-1979 at Rs. 75,000. We find that inasmuch as the authorities below were of the opinion that the assessee was not entitled to evaluate the rights, they did not consider it necessary to make a proper valuation of such trading rights of the assessee. Under the circumstances, we consider it advisable to set aside the orders of the authorities below on this issue and restore the matter for redecision by the ITO. We need not add that the department must take a consistent stand. Considering the manner in which the assessment for the year 1980-81 is made, it is apparent that the present assessment is not consistent and congruent.
As such, we will accept the assessee's appeal partly by restoring the matter for redecision by the ITO in accordance with law.
21. Before we part with the case, for what it is worth, we would like to observe that the value of the rights of the assessee now under consideration cannot, in normal circumstances, be evaluated on any basis radically different from the basis on which such rights are evaluated in the case of the producer or the distributor.