1988 (2) TMI 20 - HC - Income Tax

Court denies bad debt deduction for Rs. 2,10,000. Loss not deductible. Revenue wins. Assessee to pay costs.

Commissioner Of Income-Tax Versus K. Kr. Rm. Swaminathan Chettiar

Commissioner Of Income-Tax Versus K. Kr. Rm. Swaminathan Chettiar - [1988] 174 ITR 123, 69 CTR 9, 38 TAXMANN 75 Issues Involved:1. Admissibility of Rs. 2,10,000 as bad debt deduction for assessment year 1968-69.2. Reasonableness of the Tribunal's conclusion that the assessee incurred a loss of Rs. 2,10,000 and that it should be allowed as a deduction.Issue 1: Admissibility of Rs. 2,10,000 as bad debt deduction for assessment year 1968-69The assessee, involved in money-lending and film financing under 'Shanmuga Pictures,' claimed a business loss of Rs. 2,10,000 for the assessment year 1968-69, attributed to an advance made to Uma Pictures under a 1957 agreement. The Income-tax Officer disallowed this claim, arguing that the debt had been extinguished by subsequent transactions and that the claim was premature as the assessee had not pursued claims before the official receiver. The Appellate Assistant Commissioner upheld this view, stating that the debt was already accounted for in the 1961 agreement and that the claim was premature since the ten-year period for the distribution rights had not expired.The Tribunal, however, allowed the claim, reasoning that the assessee's acquisition of distribution rights was a means to recover the debt, and the loss was incurred in the year of account. The Tribunal found that the distribution rights had not yielded any income and that the assessee had to make compensatory payments to Subbiah.Upon review, the court noted that the assessment year in question was 1968-69 and emphasized that the debt must be written off in the same year it was deemed bad. The court found that the original debt was substituted by a new agreement in 1961, which effectively wiped out the old debt. The court held that the provisions of Section 62 of the Contract Act applied, as a new contract had replaced the original one, thereby discharging the debtor's obligations under the 1957 agreement.The court concluded that the debt had already been discharged in 1961, and there was no basis for writing off the debt in 1968-69. Therefore, the claim for a bad debt deduction in the assessment year 1968-69 was not admissible.Issue 2: Reasonableness of the Tribunal's conclusion that the assessee incurred a loss of Rs. 2,10,000 and that it should be allowed as a deductionThe Tribunal's conclusion that the assessee incurred a loss of Rs. 2,10,000 and that it should be allowed as a deduction was based on the belief that the distribution rights acquisition was a means to recover the debt. The Tribunal viewed the transactions as part of a scheme to recover the debt owed by Ramanathan Chettiar.However, the court found that the agreement dated September 5, 1961, was a new contract that substituted the original debt, thereby discharging the debtor's obligations under the 1957 agreement. The court emphasized that the new agreement was not merely a mode of recovering the loan but a business venture undertaken by the assessee, expecting to make a profit. The court noted that the agreement provided that all realisations from the film would belong to the assessee, indicating an intention to profit from the venture.The court also referred to the decision in CIT v. Coimbatore Pictures (P.) Ltd., which held that advances made by distributors to film producers need not necessarily be on revenue account and that to claim a deduction as a business loss, the loss must be incurred in the course of business and be of a revenue nature.Given that the debt had been discharged in 1961 and the new agreement represented a fresh business venture, the court concluded that there was no basis for treating the amount as a revenue loss in the assessment year 1968-69. The Tribunal's conclusion was deemed unreasonable, and the court answered both questions in the negative and in favor of the Revenue.Conclusion:Both questions were answered in the negative and in favor of the Revenue. The court held that the debt was discharged in 1961, and there was no basis for writing off the debt or treating it as a revenue loss in the assessment year 1968-69. The assessee was ordered to pay the costs of the reference, amounting to Rs. 500.