S.ARJUN,CHENNAI vs. ACIT NON CORPORATE WARD 20(1), CHENNAI

आदेश / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER In this appeal filed by the assessee, which is directed against an order dated 27.04.2018 of ld. Commissioner of Income Tax (Appeals)-14, Chennai, it is aggrieved on disallowance of a claim of write off of advance.

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Assessee an actor had filed his return for the impugned 2.

assessment year on 14.10.2010 declaring an income of

�44,19,954/-. The said return was revised on 14.03.2011, wherein

a claim for bad debt of �1,60,22,144/- was made. It seems

assessee filed one more revised return on 28.09.2011 reducing the

claim for bad debt to �95,22,144/- from the original amount of

�1,60,22,144/-. During the course of assessment proceedings,

assessee was required to explain the bad debt claimed by it. Reply

of the assessee was that he had advanced a sum of �95,22,144/- to

one M/s. Sree Raam Films (P) Ltd. As per the assessee, he and his

wife were the promoters and directors of this company. This

company, as per the assessee, was into production of movies and

had suffered huge losses. Contention of the assessee was that the

financial position of the said company was very precarious and

there was hardly any chance to get back the advance given to it.

According to the assessee, he was thus constrained to write-off the

advance as a bad debt.

However, ld. Assessing Officer was not impressed by the 3.

above reply. According to him, unless the debt which had become

bad was taken into account in computing the income of the previous

year or an earlier year, the claim could not be allowed. As per the ld.

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Assessing Officer, there was no proof brought in by the assessee to

show that the debt was actually written off by him in his books. The

claim was disallowed and the assessment completed accordingly.

Assessee’s appeal before ld. Commissioner of Income Tax 4.

(Appeals) did not meet with any success. Though the assessee

pleaded that he was a leading actor in film industry, and M/s. Sree

Ram Films (P) Ltd in which he and his wife were directors, were also

in a similar line of production and distribution of movies, and thus the

loss claimed on account of advance given to the said company was

allowable, this was not accepted by the ld. CIT(A). Ld. Commissioner

of Income Tax (Appeals) held that assessee could not furnish required

documents to prove that he had satisfied the conditions stipulated in

Section 36(2) of the Income Tax Act, 1961 (in short ‘’the Act’’). Thus,

according to him, the claim of bad debts was rightly disallowed by

the ld. Assessing Officer.

Now before us, the ld. Authorised Representative strongly 5.

assailing the orders of the lower authorities submitted that assessee

had specifically claimed before the lower authorities that the claim,

alternatively had to be allowed as a business loss. As per the ld.

Authorised Representative, the advances having being given to a

company which was pursuing the same line of activity as that of the

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assessee, once it became irrecoverable, it had to be allowed as a

business loss.

Per contra, ld. Departmental Representative strongly 6.

supported the orders of the lower authorities

orders of the authorities below. Among the very many grounds taken

by the assessee, one does say that the claim ought have been allowed

as a business loss, if it could not be considered as bad debt. It is

admitted by the ld. Assessing Officer that assessee was a film actor

and film producer. The question whether the advances given by the

assessee to M/s. Sree Ram Films (P) Ltd was in the course of his

business as a film actor and producer, has not been verified by any of

the lower authorities. There is nothing on record to show what was

the main object of M/s. Sree Ram Films (P) Ltd. None of the lower

authorities had verified whether assessee and his wife were the sole

directors and promoters of the said company. No doubt, the claim

might not have been allowable as bad debt. However, whether it could

be considered as business loss was not verified by any of the lower

authorities. Just because, assessee did not prefer such a claim before

the ld. Assessing Officer, would not mean that assessee was

precluded from pressing such a claim before the appellate

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authorities. Hon’ble Apex Court in the case of CIT vs. Woodward

Governor India P. Ltd (2009) 312 ITR 254 had held that business loss

if proved was an allowable claim u/s.37(1) of the Act. Paras 12 to 15

of the said judgment is reproduced hereunder:-

(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year ;" "29. Income from profits and gains of business or profession, how computed.—The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D." "37. General.—(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ' Profits and gains of business or profession' . Explanation.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure." (emphasis supplied) " 145. Method of accounting.—(1) Income chargeable under the head ' Profits and gains of business or profession' or ' Income from other sources' shall, subject to the provisions of sub-section (2), be

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computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assess ment in the manner provided in section 144." 13. As stated above, one of the main arguments advanced by the learned Additional Solicitor General on behalf of the Department before us was that the word " expenditure" in section 37(1) connotes " what is paid out" and that which has gone irretrievably. In this connection, heavy reliance was placed on the judgment of this court in the case of Indian Molasses Company P. Ltd. [1959] 37 ITR 66 . Relying on the said judgment, it was sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can always come back. According to the learned counsel, in the case of increase in liability due to foreign exchange fluctuations, if there is a revaluation of the rupee vis-a-vis foreign exchange at or prior to the point of payment, then there would be no question of money having gone irretrievably and consequently, the requirement of " expenditure" is not met. Consequently, the additional liability arising on account of fluctuation in the rate of foreign exchange was merely a contingent/notional liability which does not crystallize till payment. In that case, the Supreme Court was considering the meaning of the expression " expenditure incurred" while dealing with the question as to whether there was a distinction between the actual liability in praesenti and a liability de futuro. The word " expenditure" is not defined in the 1961 Act. The word " expenditure" is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head " Profits and gains of business" . In sections 30 to 36, the expressions " expenses incurred" as well as " allowances and depreciation" have also been used. For example, depreciation and allowances are dealt with in section 32. Therefore, Parliament has used the expression " any expenditure" in section 37 to cover both. Therefore, the expression " expenditure" as used in section 37

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may, in the circumstances of a particular case, cover an amount which is really a " loss" even though the said amount has not gone out from the pocket of the assessee. 14. In the case of M. P. Financial Corporation v. CIT reported in [1987] 165 ITR 765 the Madhya Pradesh High Court has held that the expression " expenditure" as used in section 37 may, in the circumstances of a particular case, cover an amount which is a " loss" even though the said amount has not gone out from the pocket of the assessee. This view of the Madhya Pradesh High Court has been approved by this court in the case of Madras Industrial Investment Corporation Ltd. v. CIT reported in [1997] 225 ITR 802 . According to the Law and Practice of Income Tax by Kanga and Palkhivala, section 37(1) is a residuary section extending the allowance to items of business expenditure not covered by sections 30 to 36. This section, according to the learned author, covers cases of business expenditure only, and not of business losses which are, however, deductible on ordinary principles of commercial accounting. (see page 617 of the eighth edition). It is this principle which attracts the provisions of section 145. That section recognizes the rights of a trader to adopt either the cash system or the mercantile system of accounting. The quantum of allowances permitted to be deducted under diverse heads under sections 30 to 43C from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining the word " paid" in section 43(2), which is used in several sections 30 to 43C, as meaning actually paid or incurred according to the method of accounting upon the basis on which profits or gains are computed under section 28/29. That is why in deciding the question as to whether the word " expenditure" in section 37(1) includes the word " loss" one has to read section 37(1) with section 28, section 29 and section 145(1). One more principle needs to be kept in mind. Accounts regularly maintained in the course of business are to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. One more aspect needs to be highlighted. Under section 28(i), one needs to decide the profits and gains of any business which is carried on by the assessee during the previous year. Therefore, one has to take into account stock-in- trade for determination of profits. The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the profit and loss account the value of the stock-in-trade at the beginning and at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year need to be computed. This is one more reason for reading section 37(1) with section 145. For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profits/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value

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of the closing stock is not brought into account, as no prudent trader would care to show increased profits before actual realization. This is the theory underlying the rule that closing stock is to be valued at cost or market price, whichever is the lower. As profits for Income-tax purposes are to be computed in accordance with ordinary principles of commercial accounting, unless such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following year' s account in a continuing business are not brought to the charge as a matter of practice, though, as stated above, loss due to fall in the price below cost is allowed even though such loss has not been realized actually. At this stage, we need to emphasise once again that the above system of commercial accounting can be superseded or modified by legislative enactment. This is where section 145(2) comes into play. Under that section, the Central Government is empowered to notify from time to time the accounting standards to be followed by any class of assessees or in respect of any class of income. Accordingly, under section 209 of the Companies Act, the mercantile system of accounting is made mandatory for companies. In other words, an accounting standard which is continuously adopted by an assessee can be superseded or modified by legislative intervention. However, but for such intervention or in cases falling under section 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the present batch of cases, there is no finding given by the Assessing Officer on the correctness or completeness of the accounts of the assessee. Equally, there is no finding given by the Assessing Officer stating that the assessee has not complied with the accounting standards. 15. For the reasons given hereinabove, we hold that, in the present case, the " loss" suffered by the assessee on account of the exchange difference as on the date of the balance-sheet is an item of expenditure under section 37(1) of the 1961 Act.

Considering all these, we are of the opinion that the question whether

the claim could be allowed as a business loss requires a fresh look by

the ld. Assessing Officer. We set aside the orders of the authorities

below and remit the issue back to the file of the ld. Assessing Officer

for consideration afresh in accordance with law.

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Order pronounced on Tuesday, the 23rd day of October, 2018, at Chennai.

Sd/- Sd/- (धु�वु� आर.एल रे�डी) (अ�ाहम पी. जॉज�) (DUVVURU RL REDDY) (ABRAHAM P. GEORGE) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य /ACCOUNTANT MEMBER चे�नई/Chennai �दनांक/Dated: 23rd October, 2018. KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF