1982-VIL-24-ITAT-
Equivalent Citation: TTJ 014, 478,
Income Tax Appellate Tribunal BOMBAY
Date: 26.06.1982
INCOME TAX OFFICER.
Vs
BOMBAY FILM LAB. PVT. LTD.
BENCH
Member(s) : V. BALASUBRAMANIAN., P. S. DHILLON.
JUDGMENT
The assessee-company runs a film processing laboratory. During the year of account the assessee claimed before the ITO a sum of Rs. 4,07,715 as bad and irrecoverable debts. This amount consisted of two parts, Rs. 3,18,709 with reference to the processing charges and Rs. 89,005 relating to advances on raw stock. According to the ITO, the claim for bad debts was not allowable as the assessee was not a money lender and it was not the assessee's business to advance money to the producers. At best the assessee was entitled to claim the amounts pertaining to the processing charges not recovered which have been accounted for as receipts. The advances given by the assessee towards purchase of raw stock or for getting the liabilities of customers are not to be considered as advances in the normal course of business of the assessee. The ITO, therefore, disallowed a sum of Rs. 2, 78,727 allowing a sum of Rs. 1,28,987. On appeal, the CIT (Appeals) found that there was some discrepancy with regard to the figures which he directed the ITO to recheck. He relied on other orders where he has considered similar claim and allowed the assessee's claim. The department has come up in appeal on this allowance made by the assessee.
2. The facts of the case indicate that the assessee claimed bad debts in respect of 32 parties covering a sum of Rs. 3,18,709 on account of processing charges not recovered and Rs. 89,005 on account of advance on raw-films not recovered. The ITO treated a sum of Rs. 1,28,987 as allowable bad debts and a balance of Rs. 2,78,727 not allowable. In fact a mistake seems to have crept in this bifurcation. The sum of Rs. 1,28,987 is computed total of 4 figures Rs. 89,005 representing advances on raw-stock not recovered and 3 other items of Rs. 22,241, Rs. 1,755 and Rs. 4,985 on account of processing charges relating to 3 parties Dhawani Prakash, Bookay Deejay Films and Mrinalsen Productions. Narration given by the ITO in his order indicates the write of in respect of processing charges not recovered as justified and allowable, whereas the advances given by the assessee towards purchase of raw-stock was not allowable. In this view of the matter, it would appear that the ITO has actually disallowed a sum of Rs. 1,28,987 and allowed Rs. 2,78,727 relating to processing charges not recovered. According to the CIT (Appeals), amounts advanced on the purchase of raw-films to parties who got processing done with the assessee was clearly an advance in the course of business and was an allowable deduction. Before us the ld. Counsel for the assessee has pointed out that the 3 amounts of Rs. 22,241, Rs. 1,755 and Rs. 4,985 relating to processing charges have been subsequently recovered by the assessee. A loan of Rs. 22,018 on raw-films in respect of Dhawani Prakash claimed as bad debt has also been recovered. If the ITO's order modified as to processing charges is treated as allowing the bad debts in respect of irrevocable processing charges, but not advances on raw-stock, the assessee's present claim comes to only Rs. 66,987. According to the ld. counsel for the assessee, this has been correctly allowed by the CIT (Appeals).
3. In the departmental appeal, it is claimed that the amounts advanced on raw-stock have been correctly disallowed by the ITO. Even in respect of processing charges not recovered, their irrecoverability has not been proved by the assessee by producing sufficient details. According to the ld. counsel for the department, therefore, the amount disallowed by the ITO had to be sustained and the CIT (Appeals) erred in giving the directions which he gave to the ITO.
4. On consideration of the facts it would appear that on principle the ITO would allow unrealised processing charges as bad debts allowable but not amounts advanced on the purchase of raw-films. The assessee's ld. counsel has pointed out that advance on purchase of raw-films was done in the normal course of the business of the assessee, since these raw-films were given to the assessee for processing by these parties. The assessee has been advancing these amounts to parties who process films with it for several years and the claim has been allowed in the past. It cannot be stated that the advances are not made in the course of the business of the assessee.
5. Where a party process the films with the assessee and as part of the transaction the assessee advances moneys to the party for purchase of raw films, it cannot be said that the advance is something decors the business of the assessee. It in fact becomes an essential part of the activity of the assessee. If in this process either the processing charges or the advance made on the raw films were not recovered by the assessee on account of the bad financial position of the party, subject to the other conditions required by law, these amounts would properly constitute bad debt allowable. The ld. counsel for the department has pointed out that in the case of advances for raw-films the films themselves constitute a security for the loan in the hands of the assessee. The raw-films being processed acquired an enhanced value as processed film and not only for the advance made on the raw-films but also the outstanding processing charges, this security would be available. In deciding the extent of bad debts, if any, to be written off, the value of the processed raw-films with the assessee constituting such security for the loan as the processing charges should be considered. There is force in this contention of the ld. Departmental Counsel. The circumstances of the present case, however, indicate that the ITO has not satisfied himself about the solvency of the parties in all the cases. He has also treated advances on raw-stock as not pertaining to the assessee's business which does not seem o be correct. On the contrary, the CIT (Appeals) without going in details into the individual financial position of the parties has given a direction as to the allowability of bad debts. In the absence of complete details, it is not possible for us to give a proper decision on the matter. In the interest of justice, we, therefore, remit the matter back to the CIT (Appeals) to consider the case of each individual debtor and allow the claim of bad debts if the amount cannot be recovered. The CIT (Appeals) is correct in principle in stating that advances made to parties who process films with the assessee even for the purposes of acquiring raw stock subsequently processed with the assessee should be regarded as being made in the course of the business of the assessee. If these amounts are lost to the assessee, they would be as much liable to be treated as bad debts as processing charges not recovered. The CIT (Appeals) would consider the claim according to law in the light of the above observations.
6. The assessee originally filed a return on 30th June, 1977 declaring an income of Rs. 21,82,700. A revised return was filed on 4th Jan., 1980 reducing the income to Rs. 18,57,300. In a letter accompanying the revised return it was claimed that the assessee saved a portion of the raw films supplied by producers for printing and processing. The assessee charged its clients a certain fixed percentage of raw-films towards wastage, but in actual practice out of such wastage, the assessee had been able to save certain amount of raw stock. The value of the raw-stock saved was shown at market rate reduced by 10 percent and this was shown as income of every year. In the revised return the assessee-company claimed that the value of raw-stock of films was not taxable on the ground that the cost of raw-films which constituted a capital asset to the assessee was nil and colour films being imported items the sale of the same was regulated by Government and the assessee was not able to effect sales of such films saved in the normal course. The revised return thus excluded the value of savings of raw-films returned as income in the original return. The valuer of such raw-films saved during the year 1977-78 under appeal came to Rs. 3,27.902 which was deducted also from the Profit & Loss Account.
7. The ITO rejected the assessee's claim to deduct from its total income the above amount of Rs. 3,27,902. According to the ITO, the savings of raw-films was a normal feature of the business activity of the assessee and constituted income of the assessee. The assessee had been following the regular system of valuing the saving from year to year and as such the method regularly employed could not be altered for the year under appeal. He, therefore, brought to tax the sum of Rs. 3,27,902. On appeal, the CIT (Appeals) held that what is relevant for working out a total business income of an assessee is a method of accounting regularly employed by him. The proper method of valuing the raw-films saved was relevant in the present case and it was open to the assessee to value the savings at cost or market rate whichever was lower. As in the present case the assessee had not incurred any cost in the raw-films saved, it was open to it to value at cost i.e. Nil and on this basis according to the CIT (Appeals), the sum of Rs.3,27,902 was to be deleted. The department has challenged this deletion.
8. According to the ld. counsel for the department, the Balance Sheet of the assessee indicated as an asset the whole of the savings of the raw-stock. The assessee's business has been in existence for more than 30 years and the assessee has been following the same method from year to year of valuing the raw-films saved, 10% below the market value for the purposes of working out its annual income. The assessee carries on the business of processing raw-films. The remuneration for this service rendered consists not merely of cash being the processing charge made but also the savings of the raw-films which constituted remuneration in kind. The ld counsel has referred to the elaborate discussion on receipts in kind available of Kanga & Palkhivala's Income tax. Referring to the difficulty in sale of raw-films imported and consequent difficulty in taking into account the films saved as profit of the assessee, it is pointed out by the ld. counsel that working out of the income in any particular case is dependent on the method of account followed. In the case of M/s Namnord Research Laboratories considered in ITA No 3134(Bom) of 1977-78 the regular method followed from year to year was to return the income on the sale of the films. That method, therefore, cannot be transplanted in the present case without taking into account the method followed by the assessee itself from year to year.
9. For the assessee it is pointed out that by mistake and following a mistaken procedure the assessee was returning from year to year the market value of the raw-films less 10% as its income. When it was known that this method was incorrect, it bona fide altered the same and filed a revised return for the correct income. The films could not be sold without the permission of the Government. It was not proper for the assessee, therefore, to account for such a profit except when a sale was made. When a bona fide modification or correction of the method followed by the assessee was made, it was proper for the ITO to make a revaluation of the stock in the case of raw-films. The law does not require anything else.
10. We have considered the case and find the department's point acceptable. Apart from any question as to whether the assessee can bona fide make a change in his method of accounting and what its effect would be, in the present case. as matter of fact, the assessee has not made any change in the method of accounting. For the year under appeal the previous year ended on 31st December, 1976. For the accounting years ending 31st December, 1977, 31st December, 1978 and even 31st December, 1979 there was no change made in the method of valuing the raw-films and incorporating the result in the Profit & Loss Account of the assessee. This stand of the assessee, therefore, that it has changed the method of accounting to a more correct one which resulted in the revision of its profit by a sum of Rs. 3, 27, 902 cannot be accepted. Apart from this the assessee has been in existence and carrying on its business for more than 20 years. A regular method of valuing raw-films saved from year to year has been followed. As correctly pointed out by the ld. counsel for the department, any savings from the raw-films tendered by the assessee's constituents for processing validly constitute an addition to the remuneration to the assessee for the processing work done by it. This receipt in kind, according to well settled law, is clearly to be brought into account at the market rate for the purposes of computing the assessee's receipts and income. In fact reducing the value of the savings in raw-films by 10% of the market value itself would, in our opinion, have been an understatement of the gross receipts of the assessee which would go into the computation of its income. Be that as it may, since the assessee has been following a regular method of valuing the stock of raw-films at the beginning of the year as well as at the end of the year at 10% less the market value its income from year to year got properly computed. Under s 145 it is the duty of the ITO to compute the correct income of the assessee for each assessment year. Where an assessee depart from the regular method followed by him for year to year this resulting in an underestimate of the income for any particular year, it is open to the ITO to compute the correct income for that year. Alternatively, if the assessee wanted to value the closing stock of raw-films at the cost of 'Nil' for this year when the question is brought up for the first time for consideration, he would be bound to value the opening stock also under the same basis with the necessity to value the stock from year to year on the same basis in future. Either way, the sum of Rs.3, 87, 902 has to be included as the income of the year under appeal.
11. The departmental appeal is partly allowed.
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