COMMISSIONER OF INCOME TAX Vs. SEMBI TRADERS

JUDGEMENT

(1.) AT the instance of the Department, the Tribunal referred the following question for the opinion of this Court, under s. 256(1) of the IT Act, 1961 :

(2.) THE assessee is a registered firm doing business in the distribution of films. It had claimed an amount of Rs. 40,814 being advance of sum of Rs. 25,814 and Rs. 15,000 made in the years ending 31st March, 1972, and 31st March, 1973, to Iran International Films at No. 44/2, Mowbrays Road, Madras-18, towards the production of a picture named, "Allahu Akbar". THE payments were made in pursuance of an agreement dt. 21st Feb., 1972. Mr. Akthar Lufti, the main partner of the said firm had agreed to distribute the same film to some others without the knowledge of the assessee and in breach of the contract with the assessee. THE assessee sent legal notice and also tried to ascertain the whereabouts of the partners so as to proceed further in the matter. THE assessee was unable to trace the persons and it was subsequently ascertained that Mr. Akthar Lufti expired on 25th June, 1974, and that the film itself had never been completed, though the assessee had initiated action on the basis of a subsequent contract for distribution with a third party in breach of the agreement with the assessee. Since neither the legal representative nor the other partners could be traced and since there was no prospect for any recovery, the assessee wrote off the entire amount in its accounts for the year ended 31st March, 1977, relevant to the assessment for 1977-78. THE ITO rejected the assessee's contention for allowance of this sum as "bad debts" as the assessee had not taken any action between 1973 and the end of the accounting year. On appeal, the CIT agreed with the order passed by the ITO.

(3.) THE above said amount was held an income receipt because the assessee received the said amount, in the course of its doing distributing agency business. It is only under these circumstances, the Supreme Court considered that the sum of Rs. 26,000 received during the course of the business of distribution which is the business of the assessee. But, according to the facts arising in the present case, the loss was not incurred in the distribution business, but the loss was incurred in acquiring the distribution right which is a capital asset. THErefore, the loss should be a capital loss and not Revenue loss. Thus considering the facts arising in this case and in the light of the judicial pronouncements cited supra, we hold that the Tribunal was not correct in coming to the conclusion that the loss incurred by the assessee in acquiring the distribution rights is a Revenue loss. In that view of the matter, we answer the question referred to us, in the negative and in favour of the Department. No costs.