Commissioner of Income Tax vs Sethu Film Distributors

Janarthanam, J.—This is a reference, at the instance of the Revenue, u/s 256(2) of the Income Tax Act, 1961 (for short, ""the I. T. Act""),

requiring this court to decide the following questions of law :

(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in holding that the two sums of Rs. 15,630 and

Rs. 21,720 claimed as business loss should be allowed, while computing the income of the assessee for the year 1972-73 ?

(2) Whether the Appellate Tribunal''s finding that the assessee had advanced money in the course of the money-lending business is based on valid

materials and is a reasonable view to take on the facts of the case ?

The respondent-assessee is a registered partnership firm, carrying on business in film distribution. As per the agreement entered into with

Messrs. Visalakshi Films on September 30, 1964, the assessee advanced a sum of Rs. 80,000 and in consideration of the amount, the assessee

was to get exhibition and exploitation rights of the picture ""Karuppu Panam"", for distribution in Madurai and Ramanathapuram Districts, for a

period of ten years. The assessee was also entitled to a commission of 15 per cent. up to a net realisation of Rs. 85,000 and 25 per cent. over and

above the net realisation of Rs. 85,000. It was the assessee''s case that as the advance was not fully recoverable, it had to writ off a sum of Rs.

15,630 and this should be allowed as ""business loss"".

Similarly, the assessee entered into an agreement with Messrs. Kamalalayam pictures on August 17, 1966, as per the terms of which the

assessee was to advance a sum of Rs. 40,000 and in consideration thereof was to get the exhibition and exploitation rights of the picture, ""Thaye

Unakaga"". The assessee was also to get 15 per cent. commission on the net realisation till the realisation reached Rs. 43,000 and 20 per cent.

thereafter. The amount not realised from that party was shown as Rs. 21,720 and this was written off and claimed as a ""business loss"".

The Income Tax Officer, while computing the assessment for the year 1972-73, did not allow the loss as claimed by the assessee on the ground

that the assessee had invested moneys for obtaining distribution rights and hence the loss was only capital in nature. This was confirmed by the

Appellate Assistant Commissioner on appeal. The assessee preferred an appeal to the Appellate Tribunal and reiterated its plea that the two sums

should be allowed as ""business loss"".

The Appellate Tribunal, by its order under consideration, allowed the appeal filed by the assessee and held that the advances made by the

assessee were not intended to be deposits for requiring the exhibition and exploitation rights, but they were only in the nature of advances made in

the nature of lending moneys for interest. The Appellate Tribunal also indicated the names of certain film producers, to whom the assessee

advanced moneys. According to the Appellate Tribunal the two film producers, namely, Messrs. Visalakshi Films and Messrs. Kamalalayam

Pictures, had failed to repay a portion of the advance and, hence, the same should be allowed as ""business loss"".

Mr. N. V. Balasubramanian, learned junior standing counsel for the Income Tax cases, placing implicit reliance on the decision in Commissioner

of Income Tax Vs. Coimbatore Pictures (P.) Ltd., , would contend that the Appellate Tribunal committed a serious error of law, in holding the two

sums, as aforesaid, as ""business loss"". He would further submit that there are no materials worth the name for the Appellate Tribunal to have come

to the conclusion that the assessee had advanced moneys in the course of money-lending business.

Mr. V. Ramachandran, learned senior counsel for the assessee, would however, repel such submissions and would try to justify the findings

recorded by the Appellate Tribunal giving rise to the reference on the aforesaid two questions.

We now propose to consider the tenability or otherwise of the second facet of the submission of learned junior standing counsel for the Income

Tax Department, revolving on the second question referred to us for decision.

It is not as if there are no materials for the Appellate Tribunal to record a finding that the business of the assessee is not only distribution of films

but is also shown to be financing in film circles as well. The plain fact is that the assessee did file a statement showing the arrears involved in very

many transactions of advancing moneys to various producers of the films, as financier, apart from the business of distribution of pictures. It was

found mentioned therein, as revealed from the order of the Appellate Tribunal, that the various transactions of film financing were only a few

instances, thereby pointing out that the transactions of such a nature are countless. To such a situation, the Revenue, as seen from the order, did not

appear to have refuted the transactions referred to therein, as well as the statements mentioned about the course of business activity of the

assessee, traceable to film financing. Such being the case, we rather feel that it is too much to contend at this stage that the finding so recorded by

the Appellate Tribunal is not based on materials relevant to such a finding. In this view of the matter, we hold that the Appellate Tribunal''s finding

that the assessee had advanced moneys in the course of money-lending business is based on valid materials and is a reasonable view to take, on

the facts and in the circumstances of the case and, accordingly, we answer the second question.

The answer, as above, to the second question, we feel, on the facts and in the circumstances of the case, has an important bearing to solve the

tangle posed in the first question referred to us for decision. The reason is rather obvious. Once it is found that the assessee had been engaged in

the commercial business activity of advancing moneys to various producers, as film financier, apart from the business of distribution of pictures, it

goes without saying that the advances were so given only in the nature of lending moneys of interest and the loss, if any, had occurred incidentally

to the business and, therefore, it is allowable ""business loss"". To put it otherwise, it cannot at all be stated that on the facts and in the circumstances

of the case, the advances made by the assessee were in the nature of investment, in the shape of deposits and the loss, if any, incurred must be

construed as a ""capital loss"".

The Appellate Tribunal distinguished the decision of this court in the case of Commissioner of Income Tax Vs. Coimbatore Pictures (P.) Ltd.,

on the grounds that the advanced in that case was treated as deposited, whereas in the present case, there was no such deposit. Secondly in that

case, there was no evidence to show that the assessee was lending moneys or that it was part of the business; whereas in the instant case, the

assessee was lending moneys not only to the two parties concerned, but also to various other producers and such advancing of moneys is the

commercial practice of the assessee. To put it otherwise, the right to exhibit and exploit pictures is the stock-in-trade of the business of the

assessee and the advances for acquisition of such a right were made in the course of business. Besides, worthy it is to mention here, the Appellate

Tribunal has referred to a decision of the apex court in COMMISSIONER OF Income Tax AND EXCESS PROFITS TAX MADRAS Vs.

SOUTH INDIA PICTURES LTD., , wherein their Lordships held that the advanced paid to producers for getting distribution rights are in the

nature of business transactions and if any loss occurred, it is in the ordinarily course of business and hence a trading loss.

For the reasons as aforesaid, we are of the view that, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in

holding that the two sums of Rs. 15,630 and Rs. 21,720 claimed as ""business loss"" should be allowed while computing the income of the assessee

for the year 1972-73 and the first question is answered accordingly.

The reference is thus answers. There shall, however, be no order as to costs in the circumstances of the case.