1967 (3) TMI 4 - SC - Income Tax

Allowance under section 10(2)(xi) - conditions for the grant of the allowance are satisfied-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 - hence loss is deductible - assessee appeal allowed

Summary

Issues:
Interpretation of agreement for financial transaction as money-lending or trade venture, Allowability of loss as bad debt under Income-tax Act, Determination of revenue loss vs. capital loss.

Analysis:
The case involved an individual appellant who entered into an agreement with a film distributor, advancing funds for the distribution and exhibition of a film. The agreement included clauses regarding profit-sharing, interest payment, and conditions for repayment of the advance. The appellant claimed a loss of Rs. 80,759 as a bad debt under section 10(2)(xi) of the Income-tax Act for the assessment year 1956-57. The Income-tax Officer disallowed the claim, categorizing the loss as a capital loss due to the nature of the transaction. The appellant's appeals to the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal were also dismissed, affirming the capital loss classification.

The appellant contended that the transaction was a money-lending activity within the course of business, allowing the loss to be treated as a revenue loss. The High Court had ruled against the appellant, emphasizing that the investment was made for profit-sharing, not interest earnings, and involved sharing both profits and losses. The appellant argued that the agreement, when considered in its entirety, should be viewed as a money-lending transaction, especially in light of clause 7 triggering a loan contract when the film release was delayed.

The Supreme Court analyzed the agreement and the circumstances leading to the loss write-off. It highlighted the distinction between capital and revenue losses, citing the Reid's Brewery Co. Ltd. v. Male case to illustrate that not all losses in business operations are capital losses. The Court emphasized that the conditions for allowing a bad debt deduction under section 10(2)(xi) were met in this case: the debt was related to the appellant's business, was incidental to the business, had become irrecoverable, and was written off in the books.

Ultimately, the Supreme Court allowed the appeal, setting aside the High Court judgment and ruling in favor of the appellant. The Court concluded that the loss claimed as a bad debt was a revenue loss, not a capital loss, and hence deductible under the Income-tax Act. The appellant was granted costs for the appeal.