{"id":216898,"date":"1967-03-21T00:00:00","date_gmt":"1967-03-20T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/b-d-bharuchabombay-vs-commissioner-of-income-tax-on-21-march-1967"},"modified":"2017-08-19T06:22:20","modified_gmt":"2017-08-19T00:52:20","slug":"b-d-bharuchabombay-vs-commissioner-of-income-tax-on-21-march-1967","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/b-d-bharuchabombay-vs-commissioner-of-income-tax-on-21-march-1967","title":{"rendered":"B.D. Bharucha,Bombay vs Commissioner Of Income-Tax, … on 21 March, 1967"},"content":{"rendered":"
Supreme Court of India<\/div>\n
B.D. Bharucha,Bombay vs Commissioner Of Income-Tax, … on 21 March, 1967<\/div>\n
Equivalent citations: 1967 AIR 1505, \t\t 1967 SCR (3) 238<\/div>\n
Author: V Ramaswami<\/div>\n
Bench: Ramaswami, V.<\/div>\n
           PETITIONER:\nB.D. BHARUCHA,BOMBAY\n\n\tVs.\n\nRESPONDENT:\nCOMMISSIONER OF INCOME-TAX, CENTRAL BOMBAY\n\nDATE OF JUDGMENT:\n21\/03\/1967\n\nBENCH:\nRAMASWAMI, V.\nBENCH:\nRAMASWAMI, V.\nSHAH, J.C.\nSIKRI, S.M.\n\nCITATION:\n 1967 AIR 1505\t\t  1967 SCR  (3) 238\n\n\nACT:\nIncome-tax Act (11 of 1922), s. 10(2)(xi)-capital or revenue\nloss-Nature, how determined.\n\n\n\nHEADNOTE:\nThe appellant, who was carrying on the business of financing\nfilm  producers and distributors, had advanced a sum of\t Rs.\n1,00,000  to a firm of film distributors.  Clause 3  of\t the\nagreement  between the parties provided that  the  appellant\nwas  not entitled to any interest but that he was  to  share\nwith  the  distributors\t their profit and loss;\t and  cl.  7\nprovided  that in case the picture was not  released  within\nthe  stipulated time, the distributors would return  to\t the\nappellant  all\tthe  moneys advanced by\t him  together\twith\ninterest at 9% per annum.  There was delay in releasing\t the\npicture\t and a dispute arose between the appellant  and\t the\ndistributors, which was settled.  The appellant found that a\nsum  of Rs. 80,759 was irrecoverable.  He accordingly  wrote\nit off as a bad debt and claimed it as a revenue loss  which\nshould be deducted under s. 10(2)(xi) of the Income-tax Act,\n1922.  The department, the Appellate Tribunal, and the\tHigh\nCourt on reference, held against the appellant, on the basis\nof  cl.\t 3 of the agreement, that the loss suffered  by\t the\nappellant was a capital loss.\nIn appeal to this Court,\nHELD  :\t Since\tall payments reduce capital one\t is  apt  to\nconsider  a  loss  as a capital loss.\tBut  losses  in\t the\nrunning\t of a business cannot be said to be of capital.\t  To\nfind out whether an expenditure is on the capital account or\non  revenue  account, one must consider the  expenditure  in\nrelation to the business.  In the present case, the debt was\nin  respect  of\t and  incidental  to  the  business  of\t the\nappellant in the relevant accounting year, and the  accounts\nof  his business were kept on mercantile basis.\t If  cls.  3\nand  7 of the agreement are read together,  the\t transaction\nwould be a money-lending transaction or a transaction in the\nnature of a financial deal in the course of the\t appellant's\nbusiness,  resulting  in  a loan  repayable  with  interest.\nTherefore,  the\t loss suffered was a revenue  loss  and\t the\nappellant was entitled to claim the deduction of the  amount\nas a bad debt under s. 10(2) (xi) of the Act. [241H; 242E-F]\nReid's Brewery Co. Ltd. v. Male, 3 T.C. 279, applied.\n\n\n\nJUDGMENT:\n<\/pre>\n
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1230 of
\n1966.\n<\/p>\n
Appeal\tby special leave from the judgment and\torder  dated
\nAugust\t27, 1962 of the Bombay High Court in Income-tax\t Re-
\nference No. 18 of 1961.\n<\/p>\n
S.   T.\t Desai,\t M.  N. Shroff for 1.  N.  Shroff,  for\t the
\nappellant.\n<\/p>\n
R.   M. Hazarnavis, Gopal Singh, S. P. Nayyar for R. N.
\nSachthey, for the respondent.\n<\/p>\n
239<\/span><\/p>\n
The Judgment of the Court was delivered by
\nRamaswami J. This appeal is brought, by special leave,\tfrom
\nthe  judgment of the High Court of Bombay dated\t August\t 27,
\n1962 in Income Tax Reference No. 18 of 1961.
\nThe  appellant\tis an individual having\t income\t from  House
\nProperty,  Government  Securities,  Cinema  Exhibition\t and
\nfinancing  film\t producers  and\t distributors.\t During\t the
\nperiod from March 3, 1952 to November 5, 1952 the  appellant
\nadvanced   a  sum  of  Rs.  40,000\/-  to  a  firm  of\tfilm
\ndistributors  known  as Tarachand Pictures.   The  appellant
\nthereafter  entered into an agreement dated January 5,\t1953
\nwith Tarachand Pictures under which the appellant advanced a
\nfurther sum of Rs. 60,000\/- in respect of the  distribution,
\nexploitation  and exhibition of a picture  called  “Shabab”.
\nAccording to cl. 2 of the agreement the distributors were to
\npay  a\tlumpsum\t of Rs. 1,750\/- by way of  interest  on\t the
\ninitial advance of Rs. 40,000\/-.  Clause 3 of the  agreement
\nread as follows :-\n<\/p>\n
\t      “No  interest will run henceforth on this\t sum
\n\t      of Rs. 40,000\/- as also on the advances to  be
\n\t      made  as provided hereinabove but in  lieu  of
\n\t      interest\tit is agreed that  the\tDistributors
\n\t      will share with the Financier profit and\tloss
\n\t      of   the\t Distribution,\t Exploitation\t and
\n\t      Exhibition of the picture SHABAB in the Bombay
\n\t      Circuit, two-third going to the Financier\t and
\n\t      one-third to the Distributors.”
\n\t      Clauses 4 and 5 were to the following effect
\n\t      “4.  The Distributors shall on or\t before\t the
\n\t      15th of every month submit to the Financier  a
\n\t      Statement\t of  Account of\t the  business\tdone
\n\t      during  the previous month in respect  of\t the
\n\t      picture ‘SHABAB’ in the territories of  Bombay
\n\t      Circuit.”\n<\/p><\/blockquote>\n
\t      “5.  The\tDistributors shall keep\t the  proper
\n\t      accounts\tof  the\t business  of  the   picture
\n\t      ‘SHABAB’\t and  the  same\t as  well   as\t all
\n\t      documents,  reports  and\tcontracts  will\t  be
\n\t      available\t to the Financier or his  agent\t for
\n\t      inspection.”\n<\/p><\/blockquote>\n
\t      Clause 7 read as follows:-\n<\/p><\/blockquote>\n
\t      “In case the picture is not released in Bombay
\n\t      within  15  months from the  date\t hereof\t the
\n\t      Distributors  shall  be bound  to\t immediately
\n\t      return  all the moneys so far advanced to\t the
\n\t      Distributors by the Financier.  In that  event
\n\t      the Distributors shall be bound to return\t all
\n\t      the moneys together with interest thereon @ 9%
\n\t      per annum.”\n<\/p><\/blockquote>\n
\t      Clause 8 stated:\n<\/p><\/blockquote>\n
\t      “In case of any breach being committed by\t the
\n\t      Dis-\n<\/p><\/blockquote>\n
\t      240<\/span><\/p>\n
\t      tributors of any of the terms herein  provided
\n\t      this agreement shall at once terminate and the
\n\t      moneys paid by the Financier shall be at\tonce
\n\t      repaid  by the Distributors to  the
\n\t      Financier with interest @ 9% per annum.”\n<\/p><\/blockquote>\n
It  appears that the distributors were not in a position  to
\nexhibit the film in Bombay within the stipulated time.\tWhen
\nthe film was ultimately released for exhibition it proved to
\nbe  unsuccessful.   The matter was taken to the\t City  Civil
\nCourt  and ultimately a consent decree was obtained in\tSuit
\nNo. 2061 of 1954 in the Bombay City Civil Court.  In the end
\nthe appellant found that there was a balance of Rs. 80,759\/-
\nwhich was irrecoverable and he accordingly wrote it off as a
\nbad  debt on December 31, 1955 in the ledger  account.\t For
\nthe assessment year 1956-57, the corresponding previous year
\nbeing  the calendar year 1955, the appellant claimed a\tloss
\nof Rs. 80,759\/- which he had written off as bad debt,  under
\ns. 10(2)(xi) of the Income-tax Act.  By his assessment order
\ndated  July 31, 1957, the Income-tax Officer disallowed\t the
\nclaim  on  the\tground\tthat  the  moneys  advanced  by\t the
\nappellant  under  the agreement could not be regarded  as  a
\ndealing\t in  the course of his financing business,  but\t the
\ntrue  nature  of  the  transaction,  as\t evidenced  by\t the
\nagreement,  was\t a venture in the nature of  a\ttrade.\t The
\nIncome-tax  Officer  accordingly held that the\tloss  was  a
\ncapital loss and it could not be allowed as a bad debt under
\ns. 10(2)(xi) of the Income-tax Act.  The appellant took\t the
\nmatter in appeal to the Appellate Assistant Commissioner  of
\nIncome-tax   who  dismissed  the  appeal.    The   appellant
\npreferred  a second appeal before the  Income-tax  Appellate
\nTribunal which by its order dated February 19, 1960 rejected
\nthe  appeal,  holding that the loss of Rs.  80,759\/-  was  a
\ncapital loss and not a loss of stock-in-trade.\tThe Tribunal
\ntook  the view that the transaction was not a joint  venture
\nwith  the distributors or any partnership business and\tthat
\nit  was\t also  not a mere financing deal or a  part  of\t the
\nmoney-lending activities of the appellant.  According to the
\nAppellate  Tribunal, the true nature of the transaction\t was
\nan  investment of the capital for a return in the  shape  of
\nshare of profits, and the loss suffered by the appellant was
\ntherefore  a  capital  loss  and not  a\t revenue  loss.\t  As
\nrequired by the appellant, the Tribunal stated a case to the
\nHigh  Court  under  s. 66(1) of the Income-tax\tAct  on\t the
\nfollowing question of law:-\n<\/p>\n
“Whether  the aforesaid loss of Rs. 80,759\/-  is  deductible
\nunder any of the provisions of the Act ?”\n<\/p>\n
By  its\t judgment  dated August 27,  1962,  the\t High  Court
\nanswered  the  Reference  in the negative  and\tagainst\t the
\nappellant.\n<\/p>\n
On  behalf of the respondent it was submitted that the\tHigh
\nCourt  was right in taking the view that the  appellant\t had
\nadvanced
\n241<\/span>
\na  sum\tof Rs. 1,00,000\/- not with a view to  earn  interest
\nthereon\t but  with  a view to making an\t investment  in\t the
\nbusiness of Tarachand Pictures and get a return on the\tsaid
\ninvestment  by\tway  of\t a share  of  profits  in  the\tsaid
\nbusiness.  It was contended that the money was not lent\t for
\nany  definite term and no rate of .interest had\t been  fixed
\nunder  cl. 3. The argument was also, stressed that cl. 3  of
\nthe  agreement\tstipulated that the appellant was  to  share
\nwith the distributors not only the profit but also the\tloss
\nof  the\t business,  and\t in the\t case  of  no  money-lending
\ntransaction is there a covenant between the parties that the
\nmoney-lender  will share the loss of the business for  which
\nthe  money is lent.  In other words, it was argued  that  no
\nmoney-lending  transaction  can have the  attribute  of\t the
\nmoney-lender  sharing the risk of the loss of  the  business
\nfor  which the money is lent, nor could it be a\t feature  of
\nany  purely  financial deal.  We are unable  to\t accept\t the
\nargument of the respondent that the transaction between\t the
\nparties under the agreement dated January 5, 1953 was not  a
\nmoney-lending transaction or a transaction in the nature  of
\na financial deal in the course of the appellant’s  business.
\nIf cl. 3 of the agreement is taken in isolation there may be
\nsome force in the contention of the respondent that the term
\nunder  which the appellant undertook to share the loss\ttook
\nthe  transaction  out  of the category\tof  a  money-lending
\ntransaction  and  the  loss suffered by\t the  appellant\t was
\ntherefore a capital loss.  In the present case, however, cl.
\n3  of the agreement dated January 5, 1953 cannot be read  in
\nisolation  but it must be construed in the context of cl.  7
\nwhich provides that in case the picture was not released  in
\nBombay\twithin 5 months from the date of the agreement,\t the
\ndistributors  will return all the moneys so far advanced  to
\nthem  by the appellant together with interest thereon at  9%
\nper annum.  It is the admitted position in the present\tcase
\nthat the picture was not released by ,the distributors\ttill
\nthe  stipulated\t date,\tnamely, April 4,  1954\tbut  it\t was
\nreleased  on May 28, 1954 and cl. 7 of the agreement  there-
\nfore  came into operation.  The result therefore is that  on
\nand from April 4, 1954 there was a contract of loan  between
\nthe  parties  in  terms of cl. 7 of the\t agreement  and\t the
\nprincipal  amount  became repayable from that  date  to\t the
\nappellant with interest thereon at 9% per annum.  It follows
\ntherefore that the appellant is entitled to claim the amount
\nof  Rs.\t 80,759\/- as a bad debt under s. 10(2) (xi)  of\t the
\nIncome-tax  Act and the loss suffered by the  appellant\t was
\nnot a loss of capital bat a revenue loss.\n<\/p>\n
To find out whether an expenditure is on the capital account
\nor on revenue account, one must consider the expenditure  in
\nrelation to the business.  Since all payments reduce capital
\nin  the ultimate analysis, one is apt to consider a loss  as
\namounting  to a loss of capital.  But it is not true of\t all
\nlosses, because losses in the running of the business cannot
\nbe said to be of capital.  The distinc-\n<\/p>\n
242<\/span><\/p>\n
tion is brought out for example, in Reid’s Brewery Co.\tLtd.
\nv.  Male(1).  In that case, the brewery company carried\t on,
\nin  addition  to the business of a brewery,  a\tbusiness  of
\nbankers and moneylenders making loans and advances to  their
\ncustomers.   This helped the customers in pushing  sales  of
\nthe product of the brewery company.  Certain sums bad to  be
\nwritten\t off and the amount was held to be  deductible.\t  In
\nthe course of his judgment Pollock B. said :\n<\/p>\n
\t      “Of course, if it be capital invested, then it
\n\t      comes  within  the express  provision  of\t the
\n\t      Income-tax  Act,\tthat no deduction is  to  be
\n\t      made on that account.”\n<\/p><\/blockquote>\n
\t      -but held that :\n<\/p><\/blockquote>\n
\t      business\tcan doubt that this is\tnot  capital
\n\t      invested.\t What it is is this.  It is  capital
\n\t      used  by the Appellants but used only  in\t the
\n\t      sense  that  all money which is  laid  out  by
\n\t      persons who are traders, whether it be in\t the
\n\t      purchase\tof  goods  be  they  traders  alone,
\n\t      whether it be in the purchase of raw  material
\n\t      be  they\tmanufacturers,\tor in  the  case  of
\n\t      money-lenders,  be they pawnbrokers or  money-
\n\t      lenders,\twhether\t it  be money  lent  in\t the
\n\t      course of their trade, it is used and it comes
\n\t      out of capital, but it is not an investment
\n\t      in the ordinary sense of the word.”\n<\/p><\/blockquote>\n
In  the\t present case, the conditions for the grant  of\t the
\nallowance  -under  s. 10(2)(xi) of the\tIncome-tax  Act\t are
\nsatisfied.   In the first place, the debt is in\t respect  of
\nthe  business  which is carried on by the appellant  in\t the
\nrelevant  accounting year and accounts of the  business\t are
\nadmittedly  kept on mercantile basis.  In the second  place,
\nthe debt is in respect of and incidental to the business ,of
\nthe  appellant.\t  It has also been found that the  debt\t had
\nbecome irrecoverable in the relevant accounting year and the
\namount had been actually written off as irrecoverable in the
\nbooks of the appellant.\n<\/p>\n
For  these reasons, we hold that the judgment of the  Bombay
\nHigh Court dated August 27, 1962 should be set aside and the
\nquestion referred to the High Court must be answered in\t the
\naffirmative and in favour of the appellant.  We\t accordingly
\nallow this appeal with costs here and in the High Court.\n<\/p>\n
V.P.S.\t\t\t\t\t\t      Appeal\nallowed.\n(1)  3 Tax Cas. 279.\n243<\/span>\n\n\n\n<\/pre>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India B.D. Bharucha,Bombay vs Commissioner Of Income-Tax, … on 21 March, 1967 Equivalent citations: 1967 AIR 1505, 1967 SCR (3) 238 Author: V Ramaswami Bench: Ramaswami, V. PETITIONER: B.D. BHARUCHA,BOMBAY Vs. RESPONDENT: COMMISSIONER OF INCOME-TAX, CENTRAL BOMBAY DATE OF JUDGMENT: 21\/03\/1967 BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. SHAH, J.C. SIKRI, S.M. CITATION: […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-216898","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nB.D. 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