1966 (6) TMI 3 - HC - Income Tax

Trade loss - Debt advanced for the acquisition of the right of distribution in the course of a business, which the assessee was conducting as a distributor and exhibitor of pictures, is clearly a debt due to him in respect of the business within the meaning of s. 10(2)(xi) of the IT Act, 1922 - therefore, sum which remained unrealised was as allowable as trade loss

Summary

Issues:
1. Allowability of deduction for a sum of Rs. 36,300 as a trade loss.
2. Allowability of deduction for a sum of Rs. 2,500 as litigation expenses.

Analysis:

The judgment delivered by the High Court of Mysore under section 66(1) of the Indian Income-tax Act, 1922, involved a reference sought by the Commissioner of Income-tax, Bangalore, regarding the deduction of certain sums in the computation of the assessee's business income. The case revolved around the assessee, engaged in the business of distributing and exhibiting pictures, entering into agreements for distribution rights with producers. An agreement with Thyagaraja Bhagavathar resulted in an advance of Rs. 50,000 by the assessee for distribution rights of a picture. Subsequently, due to the failure of the picture, the assessee had to pay back the advance to the producer and the sub-distributor. Litigation ensued, leading to a consent decree where the assessee agreed to pay Rs. 37,800 to the sub-distributor and receive a like amount from the producer.

The primary issue was whether two sums, Rs. 36,300 and Rs. 2,500, were allowable deductions as trade losses in the computation of the assessee's business income. The Income-tax Officer disallowed the sum of Rs. 41,915 as a trading loss, but the Appellate Assistant Commissioner allowed a deduction of Rs. 36,300 for the bad debt reserve account and Rs. 2,500 for litigation expenses. The Income-tax Appellate Tribunal upheld the deductions, considering the Rs. 36,300 as a trade loss due to the irrecoverable nature of the debt from Thyagaraja Bhagavathar.

The High Court analyzed the deductions in light of section 10(2)(xi) of the Income-tax Act, which allows for bad and doubtful debts as deductions. The Court agreed with the assessee's contention that the loss incurred was a trade loss, as the debt due from Thyagaraja Bhagavathar was in respect of the assessee's business and had become irrecoverable. Referring to established commercial practices and trading principles, the Court emphasized that the debt's irrecoverable nature warranted its treatment as a trading loss, as per the Supreme Court's precedent in similar cases.

The Court dismissed the Commissioner's argument that the debt was neither bad nor doubtful, highlighting that the assessee had properly written off the amount before crediting it to the bad debts reserve account. Ultimately, the Court ruled in favor of the assessee, allowing both deductions of Rs. 36,300 and Rs. 2,500 as trade losses in the computation of the assessee's business income. The assessee was awarded costs in the reference, with the question answered in favor of the assessee.