TMI Blog1991 (1) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... the year 1976-77, 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 December 6, 1974. The assessee paid a sum of Rs. 5,000 on one date in cash and a 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 in cash in contravention of section 40A( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the proceedings. Hence, this reference at the instance of the assessee. The question raised by Mr. Prasad, learned counsel for the assessee, is quite interesting. Learned counsel referred to section 40A(3) of the Act which reads thus : "Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction: (two provisos omitted, being not necessary) According to learned couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the business, profession or vocation, though such losses and expenses may not be expressly allowed under sections 30 to 43, unless the losses and expenses are expressly or by necessary implication disallowed by the Act. Three decisions of the Supreme Court were also cited to bring out the distinction. In Badridas Daga v. CIT [1958] 34 ITR 10 (SC), the question was whether where an employee who was holding the power of attorney to transact business on behalf of the firm embezzled certain amount causing trading loss to the firm, the loss was deductible. The suit filed by the assessee against the employee was decreed but a substantial amount of the decree could not be realised. The unrealised amount was written off at the end of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the taxable income. At page 623, it was held that : "But the contention was that though Schedule VI to the Companies Art may permit a provision for contingent liabilities, the Income-tax Act, 1961, does not, for, under section 36(v), the only deduction from profits and gains permissible is of a sum paid by an assessee as an employer by way of his contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust. This argument is plainly incorrect because section 36 deals with expenditure deductible from out of the taxable income already assessed and not with deductions which are to be made while making the profit and loss account. In our view, an estimated liability under g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re concerned. 'Expenditure' is thus what is 'paid out or away' and is something which is gone irretrievably." Mr. Chander Kumar, learned counsel for the Revenue, also relied upon this decision to point out that the assessee in the instant case is a film distributor and the payments were made to obtain the assessee's stock-in-trade which is the film to be exhibited. Therefore, this is a case where the payment is not made as a capital investment but in the course of the trading activity of the assessee and the payments were in the nature of present liability referred to by the Supreme Court in Indian Molasses' case [1959] 37 ITR 66. Learned counsel also pointed out that section 40A has non-obstante wording and the entire provisions of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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