AKASH FILMS Vs. COMMISSIONER OF INCOME TAX BANGALORE

JUDGEMENT

(1.) The following question of law is referred for our answer at the instance of the assessee under the provisions of the Income Tax Act, 1961 ('the Act' for short):-

(2.) In the course of the assessment proceedings for the year 1976-77, a sum of Rs. 50,000/-was found to have been debited in the profit and loss account. This represented the loss sustained by the assessee on a picture called 'Nirman'. The assessee is a distributor of films and sought sole distributorship of the film 'Nirman' for Andhra Pradesh for a consideration of Rs. 95,000/-. The agreement was dated 6-12-1974. The assessee paid a sum of Rs. 5,000/- on one date in cash and further sum of Rs. 45,000/- subsequently. Since the picture was a failure, the assessee did not release the film and wrote off this sum of Rs. 50,000/-. The claim of the assessee for excluding this sum was rejected by the Income-tax Officer on two grounds: i) the payment was made by cash in contravention of Section 40-A(3) of the Act; ii) the loss sustained by the assessee cannot be treated as a revenue loss since the picture was never released; it was a capital loss.

(3.) The Commissioner of Income-tax (Appeals)accepted the contention of the assessee that the business of the assessee was distribution of films and therefore acquisition of a film for distribution was part of acquiring stock-in-trade. Hence the loss sustained by the assessee was a trading loss and not a capital loss. The Commissioner of Income-tax (Appeals) held that Section 40-A(3) of the Act was not applicable because this was not an 'expenditure' referred therein. For the assessment year 1977-78 a similar deduction of Rs. 20,000/- in the profit and loss account arising out of the transaction regarding another picture was disallowed by the Income-tax Officer. The Appellate Assistant Commissioner affirmed the disallowance in the said case holding that it was an expenditure incurred without following the prescription laid down under Section 40-A(3) of the Act. The said picture was never produced and the whereabouts of the producer was not known.