SATYANARAYANA P Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE following question is referred for the opinion of this Court:

(2.) THE facts leading to the reference are these: THE assessee (P. Satyanarayana) is an individual carrying on business as a film distributor. His accounting year was the calendar year. THE assessment year with which we are now concerned is 1969-70. He entered into an agreement with a firm of film producers, M/s Sri Sambhu Films, Madras. That agreement was on 4th June, 1965, for acquisition of distribution rights of a film "Andhra Maha Vishnu" which was under production at that time. In pursuance of that agreement, he advanced a total amount of Rs. 1,68,000. After the film was produced, the assessee, as distributor, realised only Rs. 90,000 towards the advance of Rs. 1,68,000. That picture proved a failure. THE agreement did not provide for any security against the advance amount. All that the assessee was entitled to under the agreement was to recover the total sum advanced by him by exercising his rights as a distributor. As there was no scope of recovering any amount more than Rs. 90,000, the assessee and the producer entered into an agreement. By that agreement, a settlement was reached between the parties, under which the assessee received a sum of Rs. 50,000 in full satisfaction of the outstanding amount of Rs. 76,637 and wrote off the balance of Rs. 26,637. That settlement was on 31st May, 1968. THE assessee had yet another agreement with another film producer, M/s Swati Films, for the distribution rights of a film "Siva Leelalu". Under that agreement dt. 4th March, 1967, he advanced Rs. 43,000 upto 31st May, 1967. That picture also proved a failure, and a sum of Rs. 25,311 remained outstanding. As there was no other means of recovering the amount of Rs. 25,311, he entered into a similar agreement and settled by receiving a sum of Rs. 12,500 in full satisfaction of the amount due from the producer. THE total amount thus written off under the two settlements was Rs. 39,448, and for this amount the assessee claimed deduction as loss in business. His claim for deduction was not allowed by the ITO. But, on appeal, the AAC allowed his claim on the ground that they were bad debts. THE Revenue then went up in appeal before the Tribunal contending that the AAC was in error in holding that the debts were bad debts arising out of the business. THE Revenue also contended that no deduction could be claimed in respect of the amount of Rs. 39,448 as revenue loss because the advances were not of a business or trading nature. According to the Revenue, it was an investment of capital made by the assessee in order to secure distribution rights of the films and, therefore, should be treated as capital loss. THE case of the assessee before the Tribunal was that the loss was in the course of his business, and entering into such agreements and settlements is an accepted commercial practice and, therefore, it was trading loss. He also contended that it was a bad debt deductible under S. 36(2) of the IT Act. THE Tribunal, relying upon a decision of the Madras High Court in CIT vs. Coimbatore Pictures (P) Ltd. (1973) 90 ITR 452 (Mad) : TC14R.634, held that the facts of the case do not show that it was a trading loss and that this is not a case where the assessee carried on money-lending business and, as such, the advances given by him were not in the course of or part of money- lending business.

(3.) THE assessee's business here too is a business of distribution of films, a right which he acquired by advancing moneys to the producers. It is an accepted commercial practice. THE distributors generally advance moneys to the producers in order to enable them to complete the pictures and thus purchase distribution rights and exploit those rights. In other words, the distributor has to pay himself from the moneys realised by him by exploiting his distribution rights. THE Supreme Court in Ramchandar Shivnarayan vs. CIT 1978 CTR (SC) 5 : (1978) 111 ITR 263 (SC) : TC14R.297 after an elaborate review of the cases, reversing the decision of this Court in CIT vs. Ramchandar Shivnarayan (1972) 84 ITR 296 (AP) : TC14R.303, observed that the loss of Rs. 30,000 was directly connected with the business operation and was incidental to the carrying on of the business of purchase of Government securities to earn profit and, in such a situation, it was part of the trading loss and deductible as such in arriving at the true profits of the appellant. That was a case where a firm, carrying on business in gold, silver and gunnies, etc., derived income from investment in Government securities. A sum of Rs. 50,000 borrowed from a creditor for the purpose of purchasing Government securities was brought in cash to Rajahmundry by its employee and was handed over to its cashier. At a time when the cashier had turned his back to take out some books, a stranger suddenly arrived at the place of the assessee's business and committed theft of Rs. 30,000. In spite of lodging a complaint with the police, the amount could not be recovered. THE assessee then claimed deduction of that amount as a business loss in computing its profits and the Tribunal allowed the claim on the ground that the loss was incidental to the carrying on of its business. On a reference at the instance of the Revenue, the High Court held that the loss was not allowable as a deduction as the loss was not incidental to the assessee's business. THE Supreme Court reversed the decision of this Court and held that the loss of Rs. 30,000 was directly connected with the business operation and was incidental to the carrying on of the business of purchase of Government securities to earn profit.