9911796707
TMI Blog1981 (9) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... years past. It may be pointed out that when this reference was heard on 10th September, 1981, Mr. Dastur pointed out that the original assessee, K M. Mody, had died and his heirs and legal representatives were Roosi K. Mody and Mrs. Manek Burjor Cooper. These were the son and daughter respectively of the, said K. M. Mody. We passed an order on that date directing the Commissioner to carry out necessary amendment in the title of the reference on or before Monday 14th September, 1981. The direction has not been carried out by the Commissioner. On a number of occasions we have pointed out that the Commissioner and the solicitor to the Central Govt. are attending to litigation in the High Court in the most improper manner and it is sad that this has to be repeatedly mentioned both orally and even in judgments. To put it most mildly, the Commissioner has now proclaimed himself to be a most irresponsible and careless litigant at least as far as the Bombay High Court is concerned. It would appear that either the Commissioner or the solicitor to the Central Govt. is not able to attend to their litigation in a proper manner. This has resulted in a number of applications being dismissed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee, was also an equally well known figure in the cinema world. Sohrab Mody was the sole owner of Minerva Movietone. In 1951 Sohrab Mody thought of producing the first technicolour picture of its kind in India. The title of this picture was " Jhansi Ki Rani ". The theme of the picture was the historically well-known patriotic and heroic deeds of the Queen of Jhansi at the time of the war of independence of 1857. The international version of the picture in English was also to be produced, and that was named as "Tiger and the Flame ". Both Sohrab Mody and his wife were to play the main roles. For the purpose of production of this technicolour film, American technicians had been engaged, and the exposed film was sent to America for developing, processing and printing, as there was no facility for the same in India. Very high hopes were entertained regarding the box-office success of this film-both for the Hindi and international versions. The total cost of production of the film in both its versions was estimated to be Rs. 40 lakhs and Sohrab Mody sought the necessary finance for the same from Western India Theatres Ltd. The company agreed to advance the loan on the pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of the Hindi version and for all territories in respect of the international version. The third agreement, known as "guarantee agreement", was also executed on the same date and at the same time between Sohrab Mody as the " producer " Western India Theatres Ltd. as the " financier ", Mody Pvt. Ltd. referred to as the " distributor " and K.M. Mody referred to as the " guarantor ". By the said guarantee agreement the guarantor K.M. Mody gave a continuing and irrevocable authority to the financier, namely, Western India Theatres Ltd., to recover and to appropriate towards the account of the producer all moneys payable by the financier to the guarantor. By cl. 2 of the said agreement the guarantor also authorised the financier to appropriate rents of the several theatres leased out by him to the financier towards the liability of the producer. In this reference we are concerned with the effect and the impact of these provisions which came into operation during the three years under-consideration as also in the earlier years by reason of certain facts which we shall now immediately set out. The Hindi version of the film was released in January, 1953. In the accounting year 1952 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der was that the assessee did not carry on any business in the assessment year 1954-55 and that the main source of his income was income chargeable under the head " Other sources " under s. 12 of the Indian I.T. Act, 1922. The Tribunal also found that there was no material before it that any financing business had been carried on by the assessee in the years under consideration. It rejected the contention advanced on behalf of the assessee, which was to the effect that he had guaranteed the loan out of commercial expediency. The loss was not allowed under s. 12 of the said Act, as it did not relate to rent. The final contention of the assessee taken in the alternative, namely, that the income was diverted from him by an overriding title before its accrual and hence not his income, was also rejected. The assessee had claimed similar deduction of losses in varying amounts in the assessment years 1955-56 to 1958-59 and also in 1960-61. These claims also came up before the Tribunal and were rejected by the Tribunal by its judgment dated 9th May, 1963, in I.T.A. No. 3051 and others of 1961-62. Similar claim for the assessment year 1959-60, also was rejected by the Tribunal in an appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointed out to the Tribunal that this method of film financing was not peculiar to the particular case of Sohrab Mody but it had been earlier resorted to by K. M. Mody for other persons also. The loans raised by Sohrab Mody earlier on 5th March, 1951, had themselves been guaranteed by K. M. Mody. Alternatively, the argument seems to have been urged that even if it is assumed that film financing is a separate and independent business, then also the assessee was entitled to deduction of the loss suffered by him as a bad debt. It was urged before the Tribunal that the composite business with its several facets had been carried on by the assessee in the assessment year as also in the earlier years and/or subsequent years, though on a smaller scale. It was submitted that the view taken by the earlier judgments of the Tribunal that the assessee had discontinued his business was unsupportable and was not borne out by the facts. The test suggested and this appears to be the correct test is not whether any fresh financing transactions were made but whether the financing transactions already entered into continued to be pursued. It would also be correct to state, as was submitted, that a temp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts earlier noted and the further facts noted in para. 36 of the statement of the case showed that the business which gave rise to the loan was being carried on during the years under reference as also in the following years. According to the Tribunal, there was no material to indicate the intention of the assessee to discontinue his film business or film-financing business for good. The Tribunal was unable to accept the submission that merely because there were no fresh financing transactions it would amount to discontinuance of the business. The Tribunal thereafter considered the position of Sohrab Mody. It had been contended on behalf of the Revenue that the assessee had not taken steps to recover the amount from Sohrab Mody and, therefore, the assessee could not be said to have suffered a business loss or his debts could not be said to have become bad. The Tribunal found that the studio of Sohrab Mody was sold off, that even his wife's properties had been sold, and that there remained no other assets from which the assessee could have recovered the dues from his brother, that is, the said Sohrab Mody. Accordingly, the Tribunal accepted the assessee's plea that he was entitled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the finding of the Tribunal of there being a well recognised practice in Bombay of carrying on business by borrowing moneys from banks on the basis of joint and several liability by which the borrowers could borrow at a lower rate of interest than they would otherwise have to pay. Neither of the two decisions of the Supreme Court one in favour of the Revenue and the other in favour of the assessee are of real assistance inasmuch as they depend on the findings of fact, which in the case before us are totally in favour of the assessee. Once there is a finding that the assessee carried on a composite business, one of the facets of which was the film financing business and once we have the further finding that this was a mode of film financing, then it would have to be held that this was a business loss suffered by the assessee and the assessee was, therefore, entitled to set off the same against his rental income. Mr. Joshi, however, very strongly relied on the decision of the Punjab High Court, in Brij Mohan Laxmi Narain v. CIT [1959] 36 ITR 147 (Punj). In that case the assessee whose main business was moneylending had stood surety to the extent of Rs. 1,25,000 for certain loans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sufficient and valid consideration for the execution of the guarantee agreement. There was also, in our view, ample material for the Tribunal to arrive at the finding that the assessee was entitled to deduction of the rental income against the business losses in the three amounts earlier indicated. Accordingly, on questions Nos. 2 and 3, we uphold the view taken by the Tribunal and answer the same as under : Question No. 2 : In the affirmative and in favour of the assessee. Question No. 3 : In the affirmative and in favour of the assessee. Since this will enable the assessee to set off the rental income against the business losses, it appears to us unnecessary in this reference to consider whether the rental income was diverted at source by an overriding title. It may be that we might be required to go, into this aspect of the matter in the other reference, namely, Income-tax Reference No. 137 of 1972 . This is because certain material which was brought on the record in this matter does not appear to have been brought on the record before the Tribunal or before the AAC or the ITO in that matter. However, we will not express any further opinion on that reference. It is clear ..... X X X X Extracts X X X X X X X X Extracts X X X X
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