http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5  

PETITIONER: B.D. BHARUCHA,BOMBAY

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, CENTRAL BOMBAY

DATE OF JUDGMENT: 21/03/1967

BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. SHAH, J.C. SIKRI, S.M.

CITATION:  1967 AIR 1505            1967 SCR  (3) 238

ACT: Income-tax Act (11 of 1922), s. 10(2)(xi)-capital or revenue loss-Nature, how determined.

HEADNOTE: The appellant, who was carrying on the business of financing film  producers and distributors, had advanced a sum of  Rs. 1,00,000  to a firm of film distributors.  Clause 3  of  the agreement  between the parties provided that  the  appellant was  not entitled to any interest but that he was  to  share with  the  distributors  their profit and loss;  and  cl.  7 provided  that in case the picture was not  released  within the  stipulated time, the distributors would return  to  the appellant  all  the  moneys advanced by  him  together  with interest at 9% per annum.  There was delay in releasing  the picture  and a dispute arose between the appellant  and  the distributors, which was settled.  The appellant found that a sum  of Rs. 80,759 was irrecoverable.  He accordingly  wrote it off as a bad debt and claimed it as a revenue loss  which should be deducted under s. 10(2)(xi) of the Income-tax Act, 1922.  The department, the Appellate Tribunal, and the  High Court on reference, held against the appellant, on the basis of  cl.  3 of the agreement, that the loss suffered  by  the appellant was a capital loss. In appeal to this Court, HELD  :  Since  all payments reduce capital one  is  apt  to consider  a  loss  as a capital loss.   But  losses  in  the running  of a business cannot be said to be of capital.   To find out whether an expenditure is on the capital account or on  revenue  account, one must consider the  expenditure  in relation to the business.  In the present case, the debt was in  respect  of  and  incidental  to  the  business  of  the appellant in the relevant accounting year, and the  accounts of  his business were kept on mercantile basis.  If  cls.  3 and  7 of the agreement are read together,  the  transaction would be a money-lending transaction or a transaction in the nature of a financial deal in the course of the  appellant’s business,  resulting  in  a loan  repayable  with  interest. Therefore,  the  loss suffered was a revenue  loss  and  the appellant was entitled to claim the deduction of the  amount as a bad debt under s. 10(2) (xi) of the Act. [241H; 242E-F]

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5  

Reid’s Brewery Co. Ltd. v. Male, 3 T.C. 279, applied.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1230 of 1966. Appeal  by special leave from the judgment and  order  dated August  27, 1962 of the Bombay High Court in Income-tax  Re- ference No. 18 of 1961. S.   T.  Desai,  M.  N. Shroff for 1.  N.  Shroff,  for  the appellant. R.   M. Hazarnavis, Gopal Singh, S. P. Nayyar for R. N. Sachthey, for the respondent. 239 The Judgment of the Court was delivered by 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. 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 distributors  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  lumpsum  of Rs. 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/- as also on the advances to  be               made  as provided hereinabove but in  lieu  of               interest  it is agreed that  the  Distributors               will share with the Financier profit and  loss               of   the   Distribution,   Exploitation    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               documents,  reports  and  contracts  will   be               available  to the Financier or his  agent  for               inspection."               Clause 7 read as follows:-               "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 annum."               Clause 8 stated:

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5  

             "In case of any breach being committed by  the               Dis-               240               tributors 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 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 s. 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 loss of Rs.  80,759/-  was  a capital loss and not a loss of stock-in-trade.  The Tribunal took  the view that the transaction was not a joint  venture with  the distributors or any partnership business and  that it  was  also  not a mere financing deal or a  part  of  the money-lending activities of the appellant.  According to the Appellate  Tribunal, the true nature of the transaction  was an  investment of the capital for a return in the  shape  of share of profits, and the loss suffered by the appellant was therefore  a  capital  loss  and not  a  revenue  loss.   As required by the appellant, the Tribunal stated a case to the High  Court  under  s. 66(1) of the Income-tax  Act  on  the following question of law:- "Whether  the aforesaid loss of Rs. 80,759/-  is  deductible under any of the provisions of the Act ?" By  its  judgment  dated August 27,  1962,  the  High  Court answered  the  Reference  in the negative  and  against  the appellant. On  behalf of the respondent it was submitted that the  High Court  was right in taking the view that the  appellant  had advanced 241 a  sum  of Rs. 1,00,000/- not with a view to  earn  interest thereon  but  with  a view to making an  investment  in  the business of Tarachand Pictures and get a return on the  said investment  by  way  of  a share  of  profits  in  the  said business.  It was contended that the money was not lent  for any  definite term and no rate of .interest had  been  fixed under  cl. 3. The argument was also, stressed that cl. 3  of the  agreement  stipulated that the appellant was  to  share with the distributors not only the profit but also the  loss

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5  

of  the  business,  and  in the  case  of  no  money-lending transaction is there a covenant between the parties that the money-lender  will share the loss of the business for  which the  money is lent.  In other words, it was argued  that  no money-lending  transaction  can have the  attribute  of  the money-lender  sharing the risk of the loss of  the  business for  which the money is lent, nor could it be a  feature  of any  purely  financial deal.  We are unable  to  accept  the argument of the respondent that the transaction between  the parties under the agreement dated January 5, 1953 was not  a money-lending transaction or a transaction in the nature  of a financial deal in the course of the appellant’s  business. If cl. 3 of the agreement is taken in isolation there may be some force in the contention of the respondent that the term under  which the appellant undertook to share the loss  took the  transaction  out  of the category  of  a  money-lending transaction  and  the  loss suffered by  the  appellant  was therefore a capital loss.  In the present case, however, cl. 3  of the agreement dated January 5, 1953 cannot be read  in isolation  but it must be construed in the context of cl.  7 which provides that in case the picture was not released  in Bombay  within 5 months from the date of the agreement,  the distributors  will return all the moneys so far advanced  to them  by the appellant together with interest thereon at  9% per annum.  It is the admitted position in the present  case that the picture was not released by ,the distributors  till the  stipulated  date,  namely, April 4,  1954  but  it  was released  on May 28, 1954 and cl. 7 of the agreement  there- fore  came into operation.  The result therefore is that  on and from April 4, 1954 there was a contract of loan  between the  parties  in  terms of cl. 7 of the  agreement  and  the principal  amount  became repayable from that  date  to  the appellant with interest thereon at 9% per annum.  It follows therefore that the appellant is entitled to claim the amount of  Rs.  80,759/- as a bad debt under s. 10(2) (xi)  of  the Income-tax  Act and the loss suffered by the  appellant  was not a loss of capital bat a revenue loss. To find out whether an expenditure is on the capital account or on revenue account, one must consider the expenditure  in relation to the business.  Since all payments reduce capital in  the ultimate analysis, one is apt to consider a loss  as amounting  to a loss of capital.  But it is not true of  all losses, because losses in the running of the business cannot be said to be of capital.  The distinc- 242 tion is brought out for example, in Reid’s Brewery Co.  Ltd. v.  Male(1).  In that case, the brewery company carried  on, in  addition  to the business of a brewery,  a  business  of bankers and moneylenders making loans and advances to  their customers.   This helped the customers in pushing  sales  of the product of the brewery company.  Certain sums bad to  be written  off and the amount was held to be  deductible.   In the course of his judgment Pollock B. said :               "Of course, if it be capital invested, then it               comes  within  the express  provision  of  the               Income-tax  Act,  that no deduction is  to  be               made on that account."               -but held that :               business  can doubt that this is  not  capital               invested.  What it is is this.  It is  capital               used  by the Appellants but used only  in  the               sense  that  all money which is  laid  out  by               persons who are traders, whether it be in  the               purchase  of  goods  be  they  traders  alone,               whether it be in the purchase of raw  material

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 5  

             be  they  manufacturers,  or in  the  case  of               money-lenders,  be they pawnbrokers or  money-               lenders,  whether  it  be money  lent  in  the               course of their trade, it is used and it comes               out of capital, but it is not an investment               in the ordinary sense of the word." In  the  present case, the conditions for the grant  of  the allowance  -under  s. 10(2)(xi) of the  Income-tax  Act  are satisfied.   In the first place, the debt is in  respect  of the  business  which is carried on by the appellant  in  the relevant  accounting year and accounts of the  business  are admittedly  kept on mercantile basis.  In the second  place, the debt is in respect of and incidental to the business ,of the  appellant.   It has also been found that the  debt  had become irrecoverable in the relevant accounting year and the amount had been actually written off as irrecoverable in the books of the appellant. For  these reasons, we hold that the judgment of the  Bombay High Court dated August 27, 1962 should be set aside and the question referred to the High Court must be answered in  the affirmative and in favour of the appellant.  We  accordingly allow this appeal with costs here and in the High Court. V.P.S.                                                Appeal allowed. (1)  3 Tax Cas. 279. 243