Re-valuation of assets in books do not lead to income generation

IN THE ITAT DELHI

Moving Picture Company India Ltd.

v/s.

Assistant Commissioner of Income-tax

IT Appeal No. 210 (Delhi) of 2011

[Assessment Year 2007-08]

MARCH 16, 2012

ORDER

K.G. Bansal, Accountant Member 

The assessee has taken up five grounds in this appeal. Ground no. 4 is that the learned AO erred in not correctly computing the brought forward loss and unabsorbed depreciation. This ground has not been pressed by the ld. counsel as the computation can be corrected by the AO u/s 154 of the Income-tax Act, 1961. Ground no. 5 is residuary in nature. No fresh ground has been raised in pursuance to this ground. Therefore, both these grounds are treated as dismissed.

2. Ground nos. 1 and 2 are in respect of addition of Rs. 3,19,95,890/- made by the AO on account of “Media Library”. It is mentioned that the ld. CIT(Appeals) erred in holding that intangible assets by way of media library are in the nature of stock or scrap generated in the course of business, which have a commercial value. The facts mentioned in the assessment order are that the assessee is carrying on the business of production of TV serials. It has been producing documentaries in the nature of clippings or film documentaries. Certain pilot projects are also undertaken. These clippings and documentaries have archival value, which can be used in future. In this year, the assessee has estimated the present value of such clippings or documentaries. The result is that intangible assets have been enhanced in value by an amount of Rs. 3,19,95,873/-. A corresponding capital reserve of equivalent amount has also been created. This amount has been shown as current assets in the balance-sheet under the head media library. However, the profit has not been increased by the corresponding amount. The assessee was required to state as to why the amount should not be added to the income. It was submitted that the assessee estimated potential value of clippings, recording etc. at Rs. 3,19,95,890/. This amount has been credited to the capital reserve. The AO considered the facts of the case and submissions made before him. It has been mentioned that recording of correct value of the stock is necessary for determining the business income. The assessee has increased stock by the aforesaid amount without crediting it to profit and loss account by way of increase in the value of the stock. Therefore, it has been held that this amount is assessable as income in this year.

2.1 The issue was agitated before the CIT(Appeals)-VIII, New Delhi. In the impugned order, it has been mentioned that the dispute between the revenue and the assessee is limited to the amount of Rs. 3,19,95,890/-. The case of the AO is that this is undisclosed stock and, therefore, a revenue item taxable in this year. On the other hand, the case of the assessee-company is that there is no real addition to fixed assets, namely, media library, but its value has been notionally increased by the aforesaid amount. However, the fact of the matter is that there is an act of bringing into accounts a new asset. A corresponding capital reserve has also been created in the balance-sheet. Thus, it is not a case of creation of any artificial asset with a view to window dress its balance-sheet. One of the possibilities is that the assessee failed to properly account for items of work-in-progress knowingly or unknowingly, but, in order to remove the mistake the accounts of this year recognized additional stock of Rs. 3,19,95,890/- by initially showing it as work-in-progress and then transferring the same to the balance-sheet as an asset in the form of media library. The ld. CIT(Appeals) considered the details of work-in-progress furnished in schedule-7 of the accounts in this year. The details are as under:-

2.2 It is further mentioned that the assessee has been accounting for expenses pertaining to purchase of raw-material, payment to technicians, hiring of equipments and other miscellaneous expenses. The cost of production for these two years in terms of various expenses have been reproduced on page 7 of the impugned order.

2.3 It has also been mentioned that every item of expenditure relating to production has been accounted for. Therefore, it cannot be said that the clippings, unused portions of the serials, which have been termed as scrap, have no monetary value. Accordingly, it has been held that the stock of this year has not been enhanced by an amount of Rs. 3,19,95,890/-. Thus, this addition has been sustained.

2.4 The ld. CIT(Appeals) also took an alternative argument for sustaining the aforesaid decision. It has been the claim of the assessee that media library is a capital asset and if there is an addition thereto, no addition can be made in the hands of the assessee. However, this argument is required to be rejected because in respect of any addition to an asset, either of revenue or capital nature, the assessee has to furnish explanation as to nature and source of investment. The assessee has not furnished any explanation. Therefore, the addition can also be sustained u/s 69B of the Act.

2.5 Before us, the ld. counsel submitted that the assessee has been carrying on the business of producing motion pictures by way of documentaries etc. In this year, the assessee revised the value of stock-in-trade by an amount of Rs. 3,19,95,890/-. A corresponding capital reserve was also created. The main plank of the arguments of the lower authorities is that this amount represents unaccounted stock. However, that is not the case. He referred to schedule 7 regarding work-in-progress. This schedule has already been reproduced by us. Referring to the schedule, it is submitted that there are 7 items. Item nos. 1, 2 and 3 represent unamortized cost, work-in-progress and expenditure incurred on the film “Amrita Shergil”. These items have been shown as stock-in-trade. There is no dispute in so far as these items are concerned. Item Numbers 4, 5, 6 and 7 had earlier been accounted on nil value. However, the values of these items have now been estimated and the amount of Rs. 3,19,95,890/- is the estimated values of these items. These items have not been sold. There is no transaction with any third party in respect of these items. What has been done is that the value of non-usable scrap has been estimated and introduced in the books as an asset under the head ‘media library’. A corresponding capital reserve has been created. Since no transaction has taken place with any third party, there is no question of earning any profit in this year. Further, fictitious reserve in respect of scrap has been created only to window dress the balance-sheet so that higher loans could be taken from the banks. It is argued that a person cannot make profit from himself. Therefore, when the scrap of the value of nil is enhanced to some figure, say, Rs. 3,19,95,890/- in this case, no income accrues or arises to the assessee. It is also a matter of fact that no income has been received by the assessee in respect of this scrap. Accordingly, it is agitated that this amount is not taxable in the assessment of this year.

2.6 In reply, the ld. CIT, DR referred to page no. 25 of the paper book in which method of valuation of closing stock has been described. It is mentioned that the value of finished goods is based on estimates of the assessee, stock of tapes is valued at cost and the value of work-in-progress is also estimated by the assessee. It is submitted that the assessee is not following cost or market price, whichever is less, as the standard method for valuation of finished goods and work-in-progress. It is not known how the value of these items are estimated. Therefore, closing stock is being valued in an arbitrary manner by the assessee. In last year the assessee’s stand was that the value of four items, capitalized in that year, was nil, but in this year he wants to take the value at Rs. 3,19,95,890/-. This shows that the stock was being under-valued in respect of these items consistently till last year. Its value has been estimated in this year. These items are not of capital nature but of the nature of stock-in-trade as the assessee is in the business of producing documentaries, films etc. Therefore, this amount is required to be taxed in the hands of the assessee in this year. Alternatively, his suggestion was that if the stock was under-valued in earlier years, the AO may be directed to reopen those assessments and bring to tax such under-valuation to tax in corresponding years. He also relies on the order of the ld. CIT(Appeals).

2.7 We have considered the facts of the case and submissions made before us. The assessee was in possession of certain pilot projects, children films, Jataka stories and some other films under co-production. As these items were not sellable, their values have been taken to be nil till last year. However, these items were valued at Rs. 3,19,95,890/- in this year. A separate class of asset, namely, media library, was created and these items were put under this head of assets with a value of Rs. 3,19,95,890/-. The submission of the assessee is that it was done with a view to window dress the balance-sheet. No transaction has been taken with any outside party. Mere change of the classification of assets from stock-in-trade to capital asset does not lead to any income although such an inference may be there in case of conversion of a capital asset into stock-in-trade. It is in this background that a capital reserve of equivalent amount is created. As and when any of the item is sold, capital gains will be declared with reference to the actual cost of nil rather than the value placed now on them. The question is-whether, this amount is liable to be taxed in this year as income?

2.8 It is an accepted position of law that the re-valuation of assets in the books of the assessee does not lead to generation of income as no transaction has been taken up with an outside party. In other words, a person cannot make profit from himself by merely making some entries in the books of account. The case of the assessee is that the value of these items had been taken as nil as there was no buyer for these items. However, with a view to show improved balance-sheet for taking higher loan from the banks these assets have been shown in the balance-sheet now. Nonetheless, no item could be sold in this year also. We have considered this submission also. We find that the assessee has not incurred any expenditure which has not been recorded in the books of account. The ld. CIT(Appeals) has given a clear finding that all expenses regarding production of films etc. have been duly accounted for in the books. Therefore, it cannot be said that these assets have come out of any unaccounted income. In this light, it becomes clear that the assessee was in possession of these assets, which were valued at nil for the purpose of arriving at the value of work-in-progress. In the light of this fact, it is reasonable to infer that un-saleable work-in-progress, which was valued at nil in earlier years, has not been valued at Rs. 3,19,95,890/-. This value admittedly is an artificial value because this work-in-progress is un-sellable even now though there is a possibility of getting some amount, may be even large amount, in some future date if some buyer finds interest in these items. The ostensible purpose is to window-dress the balance-sheet, not a laudable purpose but a purpose tainted with immorality of getting higher loan with no corresponding security. Therefore, even if re-valuation may not per se lead to generation of income, we cannot approve the entries made in the books of account in this behalf, which also have tax implication in future, namely, that the business profit shall become taxable under the head ‘capital gains’. Accordingly, it is held that the re-classification of the assets and the value placed thereon in the books will have no consequence as far as income tax assessments are concerned. In other words, the assets for the purpose of income-tax shall continue to be grouped as stock-in-trade at nil value. Since no value has been realized in respect of this stock-in-trade, we are also of the view that nothing can be taxed in this behalf in this year.

2.9 Thus, ground nos. 1 and 2 are allowed as discussed above.

3. Ground no. 3 is that the ld. CIT(Appeals) erred in confirming the disallowance of Rs. 11,96,173/-, the amount written off by the assessee in the books.

3.1 In this connection, it is mentioned in the assessment order that the assessee has written off a sum of Rs. 11,96,173/- in the books. The assessee is unable to substantiate as to how this amount is deductible in computing the income. Therefore, the claim was denied.

3.2 Before the ld. CIT(Appeals), it has been submitted that all the details were filed before the AO. These amounts had been expended for the purpose of business and, thus, deductible either u/s 36 or section 37 of the Act. The details of the amounts written off were also filed. The ld. CIT(Appeals) considered the facts of the case and submissions made before him. It is mentioned that on consideration of documents placed before him, an aggregate sum of Rs. 10,13,918/- pertains to three persons as under:-

(i)  Applause Entertainment (P) Ltd. – Rs. 3,84,008/- being bad debt written off.

(ii)  VSNL-Rs. 5,00,000/- being licensing fee for channel.

(iii)  Mrs. Krishna Tiwari- Rs. 1,29,910/- being advance to staff who has left the company.

3.3 The assessee was required to furnish evidence regarding writing off the amount in the case of Applause Entertainment (P) Ltd., payment of fee to VSNL and dates and other details of payments made to Smt. Krishna Tiwari. Such details were not filed. Therefore, the claim has been disallowed.

3.4 Before us, the ld. counsel has referred to page no. 55 of the paper book, which furnishes the details of amounts written off in respect of 21 parties aggregating to Rs. 11,96,173/-. It is submitted that the matter may be restored to the file of the AO for verification of the writing off of the amount so that the matter may be decided de-novo. On the other hand, the ld. CIT, DR referred to the findings of the AO and the ld. CIT(Appeals) and submitted that no detail had been filed in respect of claims made by the assessee. Therefore, it is argued that there is no necessity to set aside the matter to the file of the AO for giving an opportunity to the assessee to improve its case.

3.5 We have considered the facts of the case and submissions made before us. We find that although certain deductions were claimed, the evidence regarding admissibility was not furnished either before the AO or the ld. CIT(Appeals). In such a circumstance, we do not think it necessary to restore the matter to the file of the AO. We uphold the finding of the ld. CIT(Appeals) that the amount is not deductible in absence of any supporting evidence.

3.6 Thus, ground no. 3 is dismissed.

4. In the result, the appeal is partly allowed.