Judicial Analysis Court Copy Headnote Facts Arguments Court observation

1967 Supreme(SC) 90

SUPREME COURT OF INDIA
J.C. SHAH, S.M. SIKRI AND V. RAMASWAMI, JJ.
B. D. Bharucha, Appellant
Versus
The Commissioner of Income-Tax, Central Bombay, Respondent.
Civil Appeal No. 1230 of 1966,
D/- 21-3-1967.
Advocates appeared
Mr. S. T. Desai, Senior Advocate (Mr. M. N. Shroff, Advocate for Mr. I. N. Shroff, Advocate, with him), for Appellant; Mr. R. M. Hazarnavis, Senior Advocate, (Mr. Gopal Singh, Advocate , and Mr. S. P. Nayyar, Advocate, for Mr. R. N. Sachthey, Advocate, with him), for Respondent

Advocates:
Gopal Singh, I.M.SHROFF, M.N.SHROFF, R.M.Hajarnavis, R.N.SACH, S.T.DESAI

A loss suffered by a taxpayer in the course of his business is a revenue loss and is deductible under S. 10 (2) (xi) of the Income-tax Act.

Headnote:
INCOME TAX - Bad debt - Loss suffered by appellant in financing film production - Whether loss of capital or revenue loss - Held, loss was revenue loss and deductible under S. 10 (2) (xi) of the Income-tax Act.
Fact of the Case:

Appellant advanced money to a film distributor under an agreement which provided for sharing of profits and losses. The film was not released within the stipulated time and the appellant wrote off the advance as a bad debt. The Income-tax Officer disallowed the claim on the ground that the advance was not a dealing in the course of the appellant's financing business but a venture in the nature of a trade. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld the order of the Income-tax Officer.
Finding of the Court:

The High Court answered the Reference in the negative and against the appellant.
Issues: Whether the loss suffered by the appellant was a loss of capital or a revenue loss.
Ratio Decidendi: The court held that the transaction between the parties under the agreement was a money-lending transaction or a transaction in the nature of a financial deal in the course of the appellant's business. The court further held that the loss suffered by the appellant was not a loss of capital but a revenue loss and was, therefore, deductible under S. 10 (2) (xi) of the Income-tax Act.
Final Decision: The court allowed the appeal and answered the question referred to the High Court in the affirmative and in favour of the appellant.

Judgement

RAMASWAMI, J. : This appeal is brought, by special leave, from the judgment of the High Court of Bombay, dated August 27, 1962 in Income-tax Reference No. 18 of 1961.

2. The appellant is an individual having income from House Property, Government Securities, Cinema Exhibition and financing film producers and distributors. During the period from March 3, 1952 to November 5, 1952 the appellant advanced a sum of Rs. 40.000 to a firm of film distributor known as Tarachand Pictures. The appellant thereafter, entered into an agreement dated January 5, 1953 with Tarachand Pictures under which the appellant advanced a further sum of Rs. 60, 000 in respect of the distribution, exploitation and exhibition of a picture called "Shabab". According to Cl. 2 of the agreement the distributors were to pay a lump sum of Rupees 1,750 by way of interest on the initial advance of Rs. 40,000. Clause 3 of the agreement read as follows:

"No interest will run henceforth on this sum of Rs. 40,000 an also on the advances to be made as provided herein above but in lieu of interest it is agreed that the Distributors will share with the Financier profit and loss of the Distribution, Exploition and Exhibition of the picture SHABAB in the Bombay Circuit, two-third going to the Financier and one-third to the Distributors."

Clauses 4 and 5 were to the following effect :

"4. The Distributors shall on or before the 15th of every month submit to the Financier a Statement of Account of the business done during the previous month in respect of the picture SHABAB in the territories of Bombay Circuit."

"5. The Distributors shall keep the proper accounts of the business of the picture Shabab and the same as well as all document reports and contracts will be available to the Financier or his agent for inspection."

Clause 7 read as follow:

"In case the picture is not released in Bombay within 15 months from the date hereof the Distributors shall be bound to immediately return all the moneys so far advanced to the Distributors by the Financier. In that event the Distributors shall be bound to return all the moneys together with interest thereon @ 9 per cent per annum."

Clause 8 stated :

"In case of any breach being committed by the Distributors of any of the terms herein provided this agreement shall at once terminate and the moneys paid by the Financier shall be at once repaid by the Distributors to the Financier with interest @ 9 per cent annum."

It appears that the distributors were not in a position to exhibit the film in Bombay within the stipulated time. When the film was ultimately released for exhibition it proved to be unsuccessful. The matter was taken to the City Civil Court and ultimately a consent decree was obtained in Suit No. 2061 of 1954 in the Bombay City Civil Court. In the end the appellant found that there was a balance of Rs. 80,759 which was irrecoverable and he accordingly wrote it off as a bad debt on December 31, 1955 in the ledger account. For the assessment year 1956-57, the corresponding previous year being the calendar year 1955, the appellant claimed a loss of Rs. 80,759 which he had written off as bad debt, under Section 10 (2) (xi) of the Income-tax Act. By his assessment order, dated July 31, 1957 the Income-tax Officer disallowed the claim on the ground that the moneys advanced by the appellant under the agreement could not be regarded as a dealing in the course of his financing business but the true nature of the transaction, as evidenced by the agreement, was a venture in the nature of a trade. The Income-tax Officer accordingly held that the loss was a capital loss and it could not be allowed as a bad debt under S. 10 (2) (xi) of the Income-tax Act. The appellant took the matter in appeal to the Appellate Assistant Commissioner of Income-tax who dismissed the appeal. The appellant preferred a Second Appeal before the Income-tax Appellate Tribunal which by its order, dated February 19, 1960 rejected the appeal, holding that the lo

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