M RAMASAMY ASARI Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee, at whose instance both the above cases have been referred to this court, is a partner in two firms, Messrs. Nityakalyana Abarna Maligai and C. Innasi Muthu Mudaliar and Sons, Madurai. He also carried on money-lending and jewellery business in his individual capacity under the name and style of "Nityakalyani Stores" at No. 40, Sea Street, Colombo THE premises of Nityakalyana Abarna Maligai, Madurai, was searched by the customs authorities in June, 1958, on suspicion that the assessee was engaged in currency smuggling activities. Certain papers found in the premises were seized by the said authorities but no action was taken against him by the said authorities thereafter based on those papers. THE Income-tax Officer, however, pursued the matter with a view to find out whether the assessee in fact carried on business in currency smuggling.

(2.) THE assessee was examined on January 12, 1959, by the Income-tax Officer in this regard. He denied having engaged himself in currency smuggling activities. However, subsequently, he gave a letter on October 25, 1959, to the Income-tax Officer stating, inter alia, that with a view to purchase peace he was prepared to be assessed on a sum of Rs. 1, 000 or Rs. 1, 500 on this account for each of the assessment years 1957-58 and 1958-59. This letter of the assessee war construed by the Income-tax Officer as an admission on his part that he was engaged in currency smuggling activities and he estimated the turnover of those activities at, Rs. 3, 00, 000 each, year, yielding a profit at 10 per cent. He, therefore, included in the income returned a sum of Rs. 30, 000 as undisclosed income from these activities in the assessment for 1958-59THE assessee had purchased a film called "New Life" for Rs. 50, 000. He thereafter entered into a partnership agreement with three persons on March 1, 1954, under the name and style of "Nityakalyani Films" for the purpose of exploiting that picture. As per the terms of the said agreement, the other three partners paid Rs. 10, 000 each towards the cost of the film. THE assessee's books of account showed a sum of Rs. 20, 000 as investment in the "Nityakalyani Films". THEre was, another account styled "the Nityakalyani Films Working Account" which showed the results of the working of the film. THE film actually yielded only a sum of Rs. 5, 925.86, the assessee's share therein being Rs. 2, 370.35. A sum of Rs. 17, 630, the difference between the sum of Rs. 20, 000 contributed by the assessee for the purchase of the film and the sum of Rs. 2, 370.35, the assessee's share in the receipts, had been written of as a trading loss in the miscellaneous expenses account of the assessee. But the Income-tax Officer took the view that the said sum represented the loss in investment and as such a capital loss which cannot be allowedTHE assessee preferred an appeal to the Appellate Assistant Commissioner against the said inclusion as also the disallowance of loss, and contended :

(3.) THE learned counsel referred to the decision of the Supreme Court in B. D. Barucha v. Commissioner of Income-tax, in support of this plea that even if the assessee had joined with others in exploiting the film, the loss incurred in the course of the exploitation of the film can be taken only to be a trading loss. In that case the assessee advanced initially a sum of Rs. 40, 000 to a film firm as a financier. Later, he entered into an agreement with the same firm under which he advanced a further sum of Rs. 60, 000 in respect of the distribution, exploitation and exhibition of a picture called "Shabab". Till the date of the agreement the firm was to pay a sum of Rs. 1, 750 by way of interest on the initial advance of Rs. 40, 000, and, thereafter, no interest was to run either on the sum of Rs. 40, 000 or on the further advance of Rs. 60, 000 but in lieu of interest, the firm was to share with the assessee the profit and loss from the exhibition of the picture. THE picture ultimately proved unsuccessful as a result of which the assessee suffered a loss of Rs. 80, 759. THE question arose as to whether the said loss is a loss of capital or a revenue loss. THE Tribunal had taken the view that the true nature of the transaction was an investment of capital for a return in the shape of a share of profits and, therefore, the loss suffered by the assessee was a capital loss. But the Supreme Court held that the loss suffered by the assessee was not a loss of capital but a revenue loss as it was in respect of and incidental to the business which was carried on by the assessee in the relevant accounting year. THE test laid down by the Supreme Court to be applied in such cases is this "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 revenue would, however, contend per contra that the loss in the exploitation of the film will be a trading loss in the hands of the firm, that it will be a capital loss so far as the assessee is concerned and the way in which the assessee has shown the amount of Rs. 20, 000 as an investment in the firm strongly supports the inference of the Tribunal that it is a capital loss. According to the revenue the stock valuation cases in Gemini Pictures Circuit Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Modern THEatres Ltd. are not relevant for the purpose of this case where the assessee himself has shown his share of the purchase price of the film as an investment in that firmWe are, however, of the view that whatever be the manner and the method of treatment of the sum of Rs. 20, 000 utilised for the purchase of the film by the assessee in his books of account, the true character of the transaction cannot be lost sight of or ignored for the purpose of ascertaining the tax liability under the statute. If really the assessee has utilised the sum of Rs. 20, 000 as his share of the purchase price of the film and has actually suffered loss in exploiting the said film, it will definitely amount to a loss in the film business.